SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
________________________
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended JUNE 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-12761
BRUSH CREEK MINING AND DEVELOPMENT CO., INC.
(Name of Small Business Issuer in Its Charter)
NEVADA
(State or Other Jurisdiction of Incorporation or Organization)
88-0180496
(I.R.S. Employer Identification Number)
11117 LOWER CIRCLE DRIVE, GRASS VALLEY, CALIFORNIA 85949
(Address of principal executive offices)
(530) 477-0834
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON, PAR VALUE
$.0001
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes No X
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: $15,390.
As of September 30, 1998, the aggregate market value of the Common Stock held by
non-affiliates of the Issuer (5,143,743 shares) was approximately $1,846,604.
The number of shares outstanding of the Common Stock ($.0001 par value) of the
Issuer as of the close of business on September 30, 1998 was 5,554,179.
Documents Incorporated by Reference: Portions of the registrant's proxy
statement for the annual meeting of shareholders to be held in fiscal 1998 are
incorporated by reference into Part III of this report.
Transitional Small Business Disclosure Format: Yes X No ____
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PART I
Certain statements contained in this Form 10 Report are forward-looking
statements, including statement with respect to the Company's budgeted or
anticipated expenses. "Forward-looking statements" can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "intend,"
"anticipate," "estimate,""continue," "present value," "future," or "reserves,"
or other variations thereof or comparable terminology. All of these statements
involve assumptions of future events which may not prove to be accurate and
risks and uncertainties. For these and other reasons, actual results may differ
materially from those projected or implied.
Item 1. DESCRIPTION OF BUSINESS.
RISK FACTORS
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LACK OF PROFITABILITY; CONTINUING LOSSES; AND DOUBTFUL ABILITY TO CONTINUE AS A
GOING CONCERN.
The Company has incurred losses of $50,059,368 from inception to June 30, 1998
and had not realized economic production as of June 30, 1998. As a result of the
Company's cumulative losses from operations, and the fact that the Company has
not realized economic production from its mineral properties, the Company's
independent auditor's report, dated November 22, 1998, for the year ended June
30, 1998, states that these conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management continues to
actively seek additional sources of capital to fund current and future
operations. There is no assurance that the Company will be successful in
continuing to raise additional capital, establishing probable or proven ore
reserves, or determining if the mineral properties can be mined economically.
Additionally, the Company is in default on the leases of certain of its mining
properties. The lessors have not taken action to foreclose on the leases and the
Company is making every effort to fulfill the agreements. The loss of these
leases would have a material adverse effect on the Company.
NEED FOR ADDITIONAL FINANCING; LACK OF LIQUIDITY; NO MATERIAL REVENUES.
The mining industry is capital intensive. During the fiscal year ended June 30,
1998, the Company raised $6,369,999 from the sale of 6,371,105 shares of Common
Stock. At June 30, 1998, the Company had a working capital deficit of $1,387,633
and had no material revenues from mining operations. Additional financing will
be required in order for the Company to cover its future mining and development
costs and to engage in full scale mining operation. At this time, the Company
has no definitive plans regarding additional financing, but believes that it
will likely be obtained through equity financing such as stock offerings or
joint ventures. No assurances can be given that the Company will be able to
raise cash from additional financing efforts and, even if such cash is raised,
that it will be sufficient to satisfy the Company's capital requirements. If the
Company is unable to obtain sufficient funds from future financings and/or
operations, the Company may not be able to achieve its business objectives and
may have to scale back its development plans. In addition, the Company may have
to sell its assets in order to meet its obligations and may lose some of its
properties for failure to make lease payments. In fiscal 1997, the Company sold
equipment in order to meet some of its obligations. In addition, the Company
could lose some of its properties for failure to make lease payments. In the
event the Company is unable to obtain additional financing the Company may be
required to seek protection under the bankruptcy laws.
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POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM; RISKS RELATING TO
LOW-PRICED STOCKS.
The Company's Common Stock is currently listed on the Nasdaq SmallCap Market.
The Securities and Exchange Commission recently approved substantial changes in
Nasdaq's SmallCap Market maintenance standards. The continued listing
requirements will be effective in February 1998. The new minimum maintenance
requirements will require net tangible assets of $2,000,000, or market
capitalization of $35,000,000, or $500,000 in net income for two of the last
three years. In addition, continued inclusion on Nasdaq will require a public
float of 500,000 shares, a $1,000,000 market value for the public float, 300
shareholders, a bid price of $1.00 per share and two market makers. Since August
1996, the bid price for the Company's Common Stock has not been $1.00 or more
per share. Accordingly, unless the price for the Company's Common Stock
improves, the Company has not been in compliance with the new maintenance
criteria effect as of February 1998. A company will not be deemed in compliance
with the minimum bid price of $1.00 per share when its stock drops below $1.00
for thirty days. The company has been notified of delisting proceedings. The
failure to meet these maintenance criteria may result in the delisting of the
Company's securities from Nasdaq, and trading if any, in the Company's
securities would thereafter be conducted in the non-Nasdaq over-the-counter
market. As a result of such delisting, an investor could find it more difficult
to dispose of, or to obtain accurate quotations as to the market value of, the
Company's securities. In addition, if the Common Stock were to become delisted
from trading on Nasdaq and the trading price of the Common Stock were to remain
below $5.00 per share, trading in the Common Stock would also be subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934, as amended, which require additional disclosure by broker-dealers in
connection with any trades involving a stock (generally, any non-Nasdaq equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon-broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
the Common Stock, which could severely limit the market liquidity of the Common
Stock.
LACK OF PROVEN OR PROBABLE ORE RESERVES OF COMMERCIAL QUANTITY AT THE MINES.
Although the Company has begun preliminary exploration activities on its mining
properties, the Company has not yet established proven or probable ore reserves.
Consequently, the Company has been unable to ascertain with certainty whether
adequate ore reserves sufficient for profitable operations exist. Management
believes, however, that an evaluation of the Company's mines completed in May
1991 indicates the existence of sufficient mineralization to warrant continued
exploration. There can be no assurance that proven or probable ore reserves will
be established.
GOVERNMENT REGULATION; ENVIRONMENTAL MATTERS.
The Company's mining facilities and operations are subject to substantial
government regulation, including federal, state and local laws concerning mine
safety, land use and environmental protection. The Company must comply with
local, state and federal requirements regarding exploration operations, public
safety, employee health and safety, use of explosives, air quality, water
pollution, noxious odor, noise and dust controls, reclamation, solid waste,
hazardous waste and wildlife as well as laws protecting the rights of other
property owners and the public. Although the Company believes that it is in
substantial compliance with such regulations, laws and requirements with respect
to the mines currently in operation, failure to comply could have a material
adverse effect on the Company, including substantial penalties, fees and
expenses, significant delays in the Company's operations and the potential
shutdown of the Company's operations.
The Company must also obtain and comply with local, state and federal permits,
including waste discharge requirements, other environmental permits, use
permits, plans of operation and other authorizations. Obtaining these permits
can be very costly and take significant amounts of time. Although the Company
foresees no material problems or delays, no assurances can be given that the
Company can obtain the necessary permits or commence mining operations, or that,
if permits are obtained, there will be no delay in the Company operations or the
Company can maintain economic production in compliance with the necessary
permits.
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COMPETITION.
The Company operates in an industry that is characterized by intense competition
for resources, equipment and personnel. Some of the Company's principal
competitors are substantially larger, have substantially greater resources, and
expend considerably larger sums of capital than the Company for exploration,
rehabilitation and development.
RISKS IN MINING OPERATIONS, INSURANCE COVERAGE AND UNINSURED LOSSES.
The Company's activities are subject to all the risk and hazards commonly
associated with mining operations, including, but not limited to unforeseen
geological formations, cave-ins, environmental concerns and personal injury. The
Company has insurance covering personal injury, workers' compensation and damage
to property and equipment, although in view of recent trends in damage awards in
personal injury lawsuits, such insurance may be insufficient to satisfy large
losses or judgments against the Company. Furthermore, certain types of insurance
coverage (generally against losses caused by natural disasters and Acts of God)
are either unattainable or prohibitively expensive. Substantial damage awards
against the Company or substantial damages not covered by insurance will affect
the Company's ability to continue as a going concern and may force the Company
to seek protection under the federal bankruptcy laws.
VOLATILE MARKET PRICES FOR GOLD.
The price of gold has a material effect on the Company's financial operations.
Following deregulation, the market price for gold has been highly speculative
and volatile. Since the end of 1987 the price of gold has declined from a high
of approximately $500 per ounce to approximately $296 per ounce at November 23,
1998. Instability in the price of gold may affect the profitability of the
Company's operations. No assurances can be given that the Company's mines
contain ore in commercial quantities or, if ore in commercial quantities is
discovered, that gold could be produced at a profit given the recent market
price range for gold.
LITIGATION; ADMINISTRATIVE PROCEEDINGS.
The Company has been involved in various litigation matters. During fiscal 1996,
the Company entered into two significant settlement agreements involving two of
such matters. In connection with one of such matters, the Company in fiscal 1997
defaulted under its obligations under the Settlement Agreement relating thereto.
Thereafter, the Company entered into revised settlement terms which provide for
various significant cash payments to be made. No assurance can be given that the
Company will be able to meet its obligations thereunder. Any default thereunder
will have a materially adverse effect on the Company which could result in the
Company seeking protection under the bankruptcy laws. Also, the Company was
notified in fiscal 1996 that it was the subject of an informal inquiry being
conducted by the staff of the Securities and Exchange Commission in connection
with the Company's financing activities pursuant to Regulation S under the
Securities Act. An adverse determination could have a material adverse effect on
the Company. See "Legal Proceedings".
DESCRIPTION OF BUSINESS
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Brush Creek Mining and Development Co., Inc. (the "Company") was incorporated in
1982 and is engaged in the exploration and development of gold and diamond
mining properties. From its incorporation until April 1989, the Company operated
as a mining and mineral development company at which time its mining operations,
conducted through the Brush Creek Joint Venture of which the Company owned 40%,
were terminated. Shortly thereafter, the Company became actively engaged in
acquiring additional mineral properties, raising capital, and preparing
properties for resumed production. The Company did not have any significant
operations or activities from April 1989 through June 1989, and suspended all
mining operations and reduced its activities to a care and maintenance level.
Accordingly, the Company is deemed to have reentered the development stage
effective July 1, 1989.
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The Company currently owns the Brush Creek, Carson, High Commission, Gardner's
Point and Pioneer Mines. The Company also has leases with options to purchase
the Ruby, Rising Sun, Kate Hardy and Omega Mines. In addition, in fiscal 1997,
the Company acquired options to purchase the New California Placer Mine and
Wilbank's Placer and Loade Mine. All of these mines, except for the Gardner's
Point and Pioneer Mines, are located in the Allegheny-Forest-Downieville mining
districts on the western slope of the Sierra Nevada mountain range in northern
California and comprise approximately 6,300 acres. Because of the proximity of
the mines to each other, the Company believes it can efficiently mine and
operate these properties since it will be able to take advantage of economies of
scale by sharing personnel, mill facilities and equipment.
Based on previous studies completed in December 1990, management believed that
the Company's mines had sufficient mineralization to warrant feasibility studies
and in January 1991 engaged Keewatin Engineering to conduct and document those
studies. The Company received Phase I and Phase II reports from Keewatin
Engineering, the Phase II report being dated October 1992. The Phase I and Phase
II reports were exploration and development reports of the
Allegheny-Forest-Downieville mining district and mining properties of the
Company, including an evaluation of the underground hard-rock system and surface
geology studies to identify precious metal rock units, and additional structural
geology studies within the district. The Ruby Mine was the Company's original
focus because of its rich production history and because permits were in place
for placer production and hard rock exploration.
The Company filed its plan of operation for the Ruby and Carson Mines with the
United States Forestry Department, and has obtained all necessary permits for
continued production and milling at the Ruby Mine of up to 225 tons of material
per day. In order to continue the underground development of the Carson vein
system, a more extensive geologic evaluation using diamond drilling on surface
and subsurface should be completed. As this was a capital intensive expense the
Company decided to detain further development of the Carson Mine until the
Company decides to integrate this program into its future development budget.
From February 1992 when the Company began limited production at the Ruby Mine to
December 1992 when the Company ceased production due to inclement weather, the
Company milled approximately 7,300 tons of mineralized placer material and
recovered approximately 200 ounces of gold, an amount which is inconsistent with
historical production at the Ruby Mine in the early 1940's. However, the
Company's management believes that these preliminary results are too small to be
a reliable representative sample of the expected placer grades.
See Part I, Item 2 for a discussion of the mining properties controlled by the
Company, which information is herein incorporated by reference.
THE COMPANY'S CURRENT FOCUS.
During fiscal 1998 the Company continued its pursuit of a joint -venture partner
which it began in fiscal 1997. In November 1997, Brush Creek successfully
concluded a mining agreement with Sterling Mining, LLC which called for payments
totaling $9,000,000. Subsequently in February 1998, the lead negotiators for
Sterling Mining agreed to contribute an additional $6,000,000 to the Company
under the name of Volcanic Resources, LLC. The monies were to be paid in over
several years. The initial venture contributions were primarily used for
exploratory mining which was conducted in the Lower Brush Creek Mine. Initially
9,000 tons of remnant pillars surrounding the Golden Gate Ore Shoot and
approximately 50,000 tons of material also situated above track level and
previously identified as prospective were targeted. Pillar number one, adjacent
to the dyke, yielded high-grade specimen gold until Company miners discovered
that, contrary to maps in the Company's possession, its top had been previously
mined, presumably by a lessor. Pillar number four also proved to have been
mined more extensively than expected. The remaining material in the pillar was
below ore grade. At about the same time, Company mining engineers and geologists
concluded that stopping on the fifth and sixth levels of the Golden Gate Shaft
to the south of the ore shoot and underhand stopes on the Peavine level might
indicate the presence of an ore shoot. Extensive exploratory mining produced
several rounds of encouraging high grade gold. Other rounds were barren, but
many showed visible gold. Overall the effort was inconclusive.
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The Company reopened the Lawry side of the Ruby Mine. The Lawry Shaft was fully
rehabilitated and the Company began drifting around the Bell works in an effort
to find the continuation of the Black Channel. Plans were made for
rehabilitating the Ruby side of the mine in an effort t reach the Big Bend area
of the Black Channel which, in the late 1930's and early 1940's, produced
perhaps the most significant collection of placer gold ever discovered. Data
available to the Company indicates that World War II interrupted mining and
perhaps a portion of this significant area has yet to be mined.
During the year the Company planned for and began construction of a new tailings
disposal pit on the Carson site. Finally, the Company investigated the
potential for mining silica at two of its mine sites.
DIAMOND EXPLORATION.
Diamonds have been reported from gold workings since 1849 in the paleoplacer
gold deposits of Butte, Plumas, Sierra, Nevada, El Dorado and Amador counties,
California. The principal district of reported diamonds was in the Cherokee
District of Butte County due west of Gardners Point.
Diamonds have also been recovered from Brush Creek's Gardners Point property. In
1872 a diamond recovered from the Gardners Point property was cut into a one
carat stone. Another diamond was also recovered at the time from the Gardners
Point Property but was "lost by the foreman, who did not know its value". These
two diamonds were recovered from a 109 square foot area of a 30 foot thick
section of the paleoplacer gold deposit. A third diamond was recovered from
hydraulic tailings in Slate Creek which probably came from the Gardners Point
hydraulic workings.
During fiscal 1997 the Company tested Gardners Point for diamond indicator
minerals. Encouraging results prompted further evaluation upstream toward the
Poker Flat area. There the Company located diamond indicator minerals in a
hard-rock breccia source. The Company is currently looking for a joint venture
partner to take the project forward.
CERTAIN SUBSEQUENT EVENTS.
The Company has had a change in management effective November 19, 1998. Mr.
James Chapin resigned as C.E.O., and Mr. Larry Stockett has assumed that role.
New management is implementing a plan to infuse significant capital and attempt
to save the NASDAQ small cap listing. NASDAQ has requested a written hearing on
Thursday, December 10, 1998, to discuss this subject. New management is
submitting reports and plans for the hearing.
EMPLOYEES.
The Company has no full-time employees, and operates in only one industry
segment. When new management is in place, and operating funds are obtained,
employees will be hired back.
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Item 2. DESCRIPTION OF PROPERTY.
The following is a discussion of the mining properties controlled by the
Company. The Company began geological and engineering studies on all of its
mining properties in January 1991. The Company received Phase I and Phase II
Reports, the most recent of which is dated October 1992, following these
studies. The Company has not completed sufficient geological activities and
drilling to establish proven or probable ore reserves for its mines other than
with respect to Gardner's Point. The Company has no present intention of
conducting further geological exploration and drilling to search for economic
mineralized material for its mining properties.
The Company has obtained engineering evidence to support probable reserves for
its Gardner's Point gold placer deposit only. All other prospects belonging to
the Company are in "exploration stage" which require additional underground work
and/or drilling and a comprehensive economical feasible report to qualify as a
commercially viable ore body.
The Company began limited production at the Wolf vein and Lawry area placer
gravels at the Ruby Mine during the fiscal year ended June 30, 1996, however,
limited production was suspended in October 1996 as the Company focused its
efforts on rehabilitating the lower Brush Creek mine. In early 1997, the Company
began preparing the lower Brush Creek Mine for limited production. In June 1997,
the Company received interim approval from the United States Forest Service to
transport thirty tons of mineralized material per day from the lower Brush Creek
Mine to the Ruby mill site. The Company has not commenced economic production
and is therefore still considered to be in the development stage. Further work
at these mines is subject to the Company receiving additional financing. There
can be no assurance that the Company will obtain any required financing or any
part thereof. In the event the Company is unable to raise the required
financing, the Company will be forced to scale back its operations. See "Risk
Factors--Need For Additional Financing; Lack of Liquidity; No Material
Revenues".
BRUSH CREEK MINE.
The Company owns the Brush Creek Mine which the Company acquired in 1982. There
are no proven or probable reserves at this time and the Company's original cost
was $408,496. This mine is currently fully operational and is currently being
worked two shifts per day underground, five days per week. All regulatory
requirements are up-to-date and approved. The Company currently operates the
mine and intends to continue to do so. Current cost of repairs and maintenance
to keep the mine operational is approximated at $123,000.
The Brush Creek Mine is an underground lode gold mine located in Sierra County,
California, approximately eight miles west of the town of Downieville,
California. It consists of eight patented mining claims comprising approximately
245 acres and 45 unpatented mining claims comprising approximately 960 acres.
The Company's investment in this property is $811,667 at June 30, 1998,
consisting of $408,496 of land and $811,667 of mining equipment. All previously
capitalized development costs have been expensed in the Consolidated Statement
of Operations for the fiscal year ended June 30, 1997 as a cumulative effect of
a change in accounting principle. See "Description of Business" under Part I,
Item 1.
All of the unpatented claims in the mineral property package are in good
standing with assessment work documents for 1997 filed with both the Bureau of
Land Management (BLM) in Sacramento and Sierra County in Downieville. The
patented claims of the Brush Creek Mine are not fully permitted for underground
exploration, development and production. A waste discharge permit is required
and a plan of operation must be filed with the U.S. Department of Forestry and
Sierra County before full scale mining may begin. The Company is in the process
of obtaining such permit or filing a plan.
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The Brush Creek Mine was opened in 1868 when the old Brush Creek Shaft was sunk
to a depth of approximately 600 feet. Reports indicate that between 1868 and
1870 it produced approximately 19,632 ounces of gold. Between 1870 and 1944,
operations at the Brush Creek Mine were limited. In 1870, it was closed due to
poor ground conditions, flooding of the shaft and a fatal accident. In 1922, the
Ante Up Mining Company drove a 2,200 foot drift which eventually connected with
the old Brush Creek tunnel. In 1927, shafts were driven into the Brush Creek
Mine by the Kate Hardy Mining Company. Between 1870 and 1994, production records
are sparse. Reports during this period indicate that 223 ounces of gold were
produced in April of 1929. Between 1944 and 1950, A.L. Merritt made additional
improvements to the Brush Creek Mine including the sinking of the Golden Gate
Shaft to a depth of approximately 647 feet. Mining activity occurred between
1978 and 1979 when new equipment was installed and a new level was started. This
activity ended when the Brush Creek Mine was flooded due to a power failure in
1979.
In April of 1982, the Company leased the Brush Creek Mine and, in February of
1984, it purchased all patented and unpatented claims of the Brush Creek Mine.
The Company continued limited development and production until the end of 1985
when the Brush Creek Mine was closed. Until the Brush Creek Mine was closed in
1985, work was carried out on an extension of the old Brush Creek Shaft and
mineralized material pockets were exploited between the 410 and 465 foot level.
A new 60 tons-per-day mill was assembled near the portal of the Brush Creek
tunnel and 14 holes totaling 4,950 feet were cored from various underground
locations. Subsequent mining produced approximately 700 to 1,000 ounces of gold.
Both upper and lower adits are reinforced with concrete and have steel security
doors. The Brush Creek Mine has 30-pound rail, and electrical and air lines on
both levels. The rail is in good condition. There is also a steel corrugated
equipment building and a small changing room for miners located on the mineral
property.
Water normally accumulates from underground sources in the Brush Creek Mine.
This water can be pumped in sufficient quantity and quality for mining
operations and the Company anticipates that it will be sufficient to meet its
mining and milling needs. In addition to underground water, two streams flow all
year on the mineral property.
The Brush Creek Mine is accessible by a graveled road maintained by Sierra
County. Snow removal is performed during the winter by the Company. Electrical
power is supplied by Pacific Gas and Electric Company, a public utility.
GARDNER'S POINT AND PIONEER MINES.
The Company owns the Gardner's Point and Pioneer Mines which mines were acquired
by the Company in 1985. The Company has obtained engineering evidence to support
probable reserves for the Gardner's Point gold placer deposit only. The
Company's original cost was $350,625. The mine has been in a care and
maintenance status since October 1988. There are no permits in place at this
time for this mine other than annual storm water permits. The Company intends to
eventually operate the mine, potentially with a partner. Current cost of repair
and maintenance to maintain this mine idle is approximately $50,000 plus
$180,000 in additional reclamation bonding.
Based upon its feasibility studies, the Company believes that the Gardner's
Point gold placer deposit contains a probable reserve of approximately 9,810,000
bank cubic yards (bcy) with an estimated average grade of 0.0221 ounce of gold
per bcy resulting in an estimated total amount of approximately 216,000
contained ounces of gold. No assurance can be given that such results will be
achieved or that any gold will be successfully mined at Gardner's Point.
The Gardner's Point and Pioneer Mines include two placer mines located on the
same parcel of land comprising approximately 700 acres. These mines are
approximately 10 air miles northwest of Downieville and three air miles east of
La Porte in Sierra County, California in the Port Wine Gold Mining Region. The
Gardner's Point and Pioneer Mines are approximately 12.5 air miles from the
Company's other mines. These mines consist of three patented claims, the
Pioneer, the Comet, and the Challenge, and two unpatented claims. The Company's
investment in this property is $1,084,325 at June 30, 1998, consisting of
$185,477 of land, $770,327 of development costs, and $128,521 of mining
equipment.
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All of the unpatented claims in the mineral property package are in good
standing with assessment work documents for 1997 filed with both the BLM in
Sacramento and Sierra County in Downieville. A new operating permit and a waste
discharge permit are required before full scale mining may begin at the Pioneer
Mine. The Company has no current plans to obtain such a permit.
Gold was first discovered in the area of the Gardner's Point and Pioneer Mines
on Rabbit Creek in 1850 at the approximate location of the present town of La
Porte. After 1885, drift mining continued along portions of the Port Wine
Tertiary Channel, but progressively diminished after the turn of the century. In
1934, renewed activity occurred as a result of an increase in the price of gold
mandated by the federal government. Following the outbreak of World War II,
however, the federal government brought a halt to gold mining activities.
In 1980, the higher price of gold led to the search for and leasing of the
Gardner's Point and pioneer Mines by Mr. L.F. Goodson and the Gardner's Point
Mine, a California Limited Partnership. Appealing characteristics of the
Gardner's Point and Pioneer Mines were the unusually large amount of flat
working space and areas of low overburden.
In 1985, the Brush Creek Joint Venture, consisting of the Company and two other
companies, purchased all patented and unpatented claims of the Gardner's Point
and Pioneer Mines, and it produced approximately 2,800 ounces of gold from its
operations before deciding in August of 1988 to suspend operations at the
Gardner's Point and Pioneer Mines and reduce operations to a care and
maintenance level. The Gardner's Point and Pioneer Mines were subsequently
purchased by the Company in connection with the change of control of the Company
in 1989.
The Gardner's Point and Pioneer Mines have a Yuba-Lowe trommel which contains
new interior screens and a water hutch. Additionally, the property has a
two-story gold recovery building which houses a large Deister table and
associated equipment for gold recovery. The Company spent approximately $100,000
to upgrade and improve water quality measures on these mines.
The Gardner's Point and Pioneer Mines are accessible year round by roads
maintained by Sierra County. However, the Company is responsible for snow
removal in the winter. Existing access to the Gardner's Point and Pioneer Mines
is from La Porte, California through the site of Queen City. It is also possible
to reach these mines from Challenge, California through Union Hill. Access to
the Gardner's Point and Pioneer Mines for heavy equipment is by United States
Forest Service Roads from Strawberry Valley, California. Power is generated on
the site of the Gardner's Point and Pioneer Mines.
Pursuant to SMARA guidelines, the Company has submitted through its consultant,
Vector Engineering, Inc., a revised reclamation cost estimate on Gardner's Point
and is entering into a phased program for approval with the lead agency and the
Department of Conservation. Also during the same procedure, the Company will
address the use permit for the mine as well as an interim management plan for up
to a five year period. Additional reclamation bonding will be required
subsequent to final approval of this plan.
The Brush Creek Joint Venture submitted applications to Sierra County and the
U.S. Forest Service in March of 1987 to initiate production activity at the
Pioneer Mine. However, the authorities determined that an Environmental Impact
Report (EIR) was necessary before exploration permits could be granted. Sierra
County, acting as the lead agency, contracted with an engineering firm to
complete the study. The draft EIR has been completed, distributed to the public
and interested agencies, and comments have been returned and addressed by the
Company. A final EIR must be submitted to and approved by Sierra County before
production at the Pioneer Mine may begin. The Company has not submitted the
request to continue the EIR process, and does not intend to do so at this time.
Currently, the property is in a care and maintenance status.
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RUBY MINE.
Pursuant to a leasehold interest acquired in 1989, the Company leases the Ruby
Mine with an option to purchase for $4,000,000. The Company pays $13,066 monthly
as a minimum lease payment. There are no proven or probable reserves at this
time. The Company's original cost for the lease was $200,000. The mine is
currently not in operation, has been idle for approximately 1-1/2 years. The
Company intends to re-open the mine as soon as practical. The Company has
requested a courtesy inspection from California OSHA. The Company believes that
all other permits are in place to operate the mine. The Company fully intends
to operate this mine. Current cost of repairs and maintenance to render the
mine idle is $20,000.
In December of 1989, the Company issued 100,000 shares of its Common Stock which
it used to purchase an option to lease the Ruby Mine and to purchase equipment
located on the site. In March of 1990, the Company paid $50,000 to extend the
option period to April 30, 1990. In April of 1990, the Company issued an
additional 125,000 shares of its common stock in order to extend the option
period to June 30, 1990. The Company exercised the option on June 30, 1990 by
paying the owner $150,000 cash, which represents lease consideration of $50,000
and a $100,000 down payment on the purchase of the equipment. To complete the
equipment purchase, the Company agreed to pay an additional $100,000 in cash in
three equal semi-annual installments, which have been paid. The Company's
investment in this mineral property consists of $1,975,525 of mining equipment.
All previously capitalized development costs and land options have been expensed
in the Consolidated Statement of Operations for the fiscal year ended June 30,
1997 as a cumulative effect of a change in accounting principle. See
"Description of Business" under Part I, Item 1.
Pursuant to the terms of the lease, which was most recently modified on March
27, 1997, the Company must pay a 7-1/2% net smelter royalty on all minerals
produced from lode deposits and 10% on minerals produced from placer deposits
with a minimum lease payment of $13,066 per month through June 30, 2000, subject
to an adjustment based on the Consumer Price Index. The lease may be extended
for two additional five-year periods or the mineral property may be purchased
for $4,000,000 subject to adjustment based on the Consumer Price Index payable
by June 30, 2000. All payments made subsequent to July 1, 1995, to acquire the
lease/option and all payments made under the lease subsequent to July 1, 1995,
will be credited against the option purchase price. Performance under the lease
purchase agreement is secured by the Company's equipment used in the mining
operations on the leased premises.
During 1997, the Company negotiated modification agreements for the Ruby Mine
and the Rising Sun Mine (see below) to pay, in cash, one month lease payment in
arrears, increase the amount of equipment held as collateral pursuant to the
Ruby Mine and the Rising Sun Mine lease agreements by filing UCC-1 financing
statements listing the additional equipment, all right, title and interest of
certain "ore specimens" for which Ruby Development Co., Inc. will credit the
value against past due minimum royalty payments and grant Ruby Development Co.,
Inc. an option to purchase up to 50,000 shares of the Company's common stock at
a price of $.25 per share until July 1, 1999. The Company has not made any
payments on this lease since June of 1998. The Company owes the lessor
approximately $165,000 in past due lease payments and related interest. There
is a question as to whether the Company currently has a lease.
The Ruby Mine is an underground placer and lode mine located between Downieville
and Forest City, California in Sierra County. The Ruby Mine consists of two
patented claims comprising approximately 435 acres and 37 unpatented claims
comprising approximately 1,150 acres. The mine encompasses four distinct
underground river channels and three known lode gold veins.
All of the unpatented claims in the mineral property package are in good
standing with assessment work documents for 1997 filed with both the BLM in
Sacramento and Sierra County in Downieville. The patented claims of the Ruby
Mine are fully permitted for underground exploration, small scale development
and small scale production. However, a waste discharge permit is required and a
plan of operation must be filed with the U.S. Department of Forestry before
operations can be expanded beyond the current 225 tons-per-day.
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Production began at the Ruby Mine in the late 1870's when approximately 50,000
ounces of gold were extracted from what became known as the Old Ruby Channel. In
the 1930's, the Ruby Mine was purchased by Clarence L. Best, who produced gold
from the mine until it was closed in 1942 by War Production Board Order L- 208.
High labor rates and a gold price freeze kept the Ruby Mine from re-opening. In
the 1950's, the Ruby Mine was sold and was subsequently mined by small operators
until the mid-1970's. In 1979, the mine was leased to Alhambra Mines, Inc. After
limited rehabilitation, Alhambra Mines, Inc. failed to make lease payments and
the Ruby Mine reverted to its owner.
The majority of the historical production at the Ruby Mine has come from
underground placers. Since 1942 virtually no new ground has been opened and most
of the attention has been directed at the Wolf lode vein and the Big Bend area
of the Black Channel, a famous underground placer. Due to extensive overburden
of up to 700 feet on the mineral property, the only way new reserves will be
established is from underground, utilizing mapping, sampling, and drilling
techniques and by opening new ground.
The Ruby Mine hosts a gold recovery washing plant with all associated equipment,
a mill building, and a separate compressor building in good condition. The Ruby
Tunnel has been rehabilitated, retimbered and refitted. The underground workings
include 30-pound mine rail and electrical and ventilation equipment. The Ruby
Mine has compressors, generators and an electric train with sufficient haulage
capacity to feed a 200 ton per-day-mill. There are 21 mine ore cars and a Mancha
locomotive in good condition on the mineral property.
The Ruby Mine is accessible via State Highway 49 to Pliocene Road to the Henness
Pass paved road then via five miles of paved and gravel road. Power is generated
on the site.
The Company filed its plan of operation for the Ruby and Carson Mines with the
United States Forestry Department, and has obtained all necessary permits for
production and milling at the Ruby Mine of up to 225 tons of material per day.
The mine, if operated, however, has been operating at less than 225 tons of
material per day. From February 1992 when the Company began limited production
at the Ruby Mine to December 1992 when the Company ceased production due to
inclement weather, the Company milled approximately 7,300 tons of mineralized
material and recovered approximately 200 ounces of gold, an amount which is
inconsistent with historical production at the Ruby Mine in the early 1900's,
and is insufficient in total quantity to be a reliable representative sample of
the expected grade of the mineralized gravel. Consequently, no assurances can be
given that future production will result in grades of similar or historical
amount. Furthermore, the Company has not completed sufficient geological
activities and drilling to establish proven or probable ore reserves at the Ruby
Mine. The Company has no present intention of conducting further geological
exploration and drilling to establish ore reserves at the Ruby Mine at this
time.
From December 1992 when the Company ceased production at the Ruby Mine until
July 2, 1993, when the Company recommenced production, the Company rehabilitated
and re-timbered approximately one and one-quarter miles of horizontal haulage
tunnel supports and a 210 foot vertical shaft for mine safety, built underground
roads for use by diesel loaders, constructed a new sixty-foot steel head frame
and installed a hoist over the Lawry Shaft at the Ruby Mine, installed a
complete underground ventilation system and electrical system at the Lawry
Shaft, constructed a new waste water treatment system for use at the mill site,
modified and enlarged the structures and ore bins at the mill site, and removed
two main mill and warehouse structures at the Carson Mine.
The Company commenced production in the Lawry Shaft, a new area of the Ruby
Mine, on July 2, 1993, and in August 1993 recommenced production in the Black
Channel of the Ruby Mine where most of the production occurred between February
1992 and December 1992. The Company has completed the sixty foot steel head
frame at the Lawry Shaft and set-up electrical lines and constructed a hoist
house, with associated hoist equipment.
The Company recommenced production in the Lawry Shaft on June 26, 1994.
Underground programs consisted of driving exploration drifts towards potential
primary channels. Sampling programs were undertaken to allow the mining of
approximately 5,000 tons of material. The Company drove a total of approximately
430 feet downstream and 520 feet upstream in the Lawry Channels. The Lawry shaft
is currently under care and maintenance as the Company concentrates on its hard
rock targets.
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RISING SUN MINE.
Pursuant to an interest acquired in 1989, the Company leases the Rising Sun Mine
with an option to purchase for $1,000,000. The Company pays a minimum monthly
lease payment of $5,213. There are no proven or probable reserves in this mine
at this time. The Company's original cost was 10,000 shares of the common stock
and $20,000. The mine is currently idle. Regulatory requirements before the mine
is operational are: Approved Use Permit from lead agency of Sierra County; Plan
of Operations from US Forest Service; Waste Discharge Permit from California
Water Quality Control Board; Approval from California Fish and Game; Approval
from Northern Sierra Air Quality Board. The Company fully intends to operate
this mine. Current costs of repairs and maintenance to keep the mine idle is
$1,000.
As stated above, in December of 1989, the Company issued 10,000 shares of its
common stock for an option to lease the Rising Sun Mine. On June 30, 1990, the
Company exercised the option upon payment of $20,000 cash and entered into a
five year lease with an option to purchase. Pursuant to the terms of the lease,
which was most recently modified on November 11, 1994, the Company must pay a
net smelter royalty of 8% on all minerals produced with a minimum royalty of
$4,590 per month, through June 30, 2000, subject to an adjustment based on the
Consumer price index. The mineral property may be purchased for $1,000,000
payable on or before June 30, 2000, subject to adjustment based on the Consumer
Price Index. All payments made to acquire the lease/option and all payments made
under the lease will be credited against the option purchase price. See the
discussion of the Ruby Mine above for information on the modification agreement
entered into in 1997. The Company has not made any payments on this lease since
June of 1998. The Company owes the lessor approximately $55,000 in past due
lease payments and related interest. There is a question as to whether the
Company currently has a lease The Company has no investment in this mineral
property at June 30, 1998. All previously capitalized development costs and
land options have been expensed in the Consolidated Statement of Operations for
the fiscal year ended June 30, 1997 as a cumulative effect of a change in
accounting principle. See "Description of Business" under Part I, Item 1.
The Rising Sun Mine is an underground lode gold mine located approximately three
miles southeast of Allegheny, California. It consists of four patented claims
comprising approximately 52 acres, three unpatented claims comprising
approximately 60 acres, and one placer claim comprising 10 acres.
All of the unpatented claims in the mineral property package are in good
standing with assessment work documents for 1997 filed with both the BLM in
Sacramento and Sierra County in Downieville. There are currently no existing
permits to mine either the patented or unpatented claims.
The Rising Sun Mine produced gold as early as 1882. By 1883 two tunnels had been
driven and production is estimated to have exceeded 3,000 ounces of gold. The
Rising Sun Mine closed after an attempt to design and construct a mill failed in
the 1890's. During the early 1960's the mine re-opened and considerable drilling
and raising was conducted in an effort to intersect the Rising Sun Vein and
Cedar Vein. Mining ceased as custom milling became prohibitively expensive. In
1960, the Rising Sun Mine was acquired by the Rising Sun Development Company. In
1973, G.R. Beechel completed a mapping program and compiled a list of
recommendations for further work.
There is a generator, compressor, rock drills, and a mucking machine on the
mineral property. The overall ground condition of the mine is good. Since the
early 1960's, the Rising Sun Mine has operated on a care and maintenance level
only. Currently, however, the Company is driving around a caved in area in an
attempt to get to the face of the drift where high-grade assays have been
reported. The Company also is attempting to find the potentially high grade
intersection of the Belmont and Rising Sun veins.
The Rising Sun Mine is accessible via Kanaka Creek Road, a graveled road. The
mineral property will require on-site generators to supply power.
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CARSON MINE.
The Company owns the Carson Mine which was acquired in July 1990. There are no
proven or probable reserves at this mine at this time. The Company's original
cost was $2,299,000. The mine is currently idle. The regulatory requirements
of this mine are under the same Plan of Operations as for the Ruby Mine: i.e.
the Company is waiting for approval from the US Forest Service Renewal three
year Plan of Operations. There are no other regulatory permits to make the mine
fully operational. The Company fully intends to operate this mine. Current costs
for repair and maintenance are $25,000 to remain idle on this mineral property.
The cost to become operational is $100,000.
The Carson Mine is located in Sierra County, California, on the western slope of
the Sierra Nevada Mountain Range. Access to the Carson Mine is by a two mile
dirt road, which connects the Henness Pass Road, an all weather paved road. The
nearest large population center is Grass Valley, about 40 miles south of the
site. Downieville is located two miles north of the Carson Mine. Allegheny,
California is approximately four miles south of the Carson Mine. The Carson
Mine, also known as the City of Six Mine, is an underground mine and consists of
21 unpatented lode claims and two unpatented placer claims comprising
approximately 550 acres. The Company's investment in this mineral property is
$2,242,693 at June 30, 1998, consisting of $2,199,858 of land, and $42,835 of
mining equipment. All previously capitalized development costs have been
expensed in the Consolidated Statement of Operations for the fiscal year ended
June 30, 1997 as a cumulative effect of a change in accounting principle. See
"Description of Business" under Part I, Item 1.
The City of Six gravel deposit was discovered at the site of the Carson Mine in
the 1850's. The mineral property was operated as a hydraulic pit until 1886,
when hydraulic mining was stopped in California by judicial mandate. From 1860
to 1879, the gravel was worked underground by drift mining. Reports from 1879
indicate that a channel had been tunneled from the City of Six pit to Rock
Creek, a distance of about one mile.
Work began on the Carson Mine in the mid 1920's. By 1930, two adits had been
driven on the Carson Mine vein; the upper adit 925 feet and the lower adit about
2,600 feet. The two adits are separated vertically by 460 feet and on the dip by
500 feet. From 1932 to 1942, a 500 foot raise was constructed from the lower
level to the upper level. The raise was used as an ore pass, allowing
mineralized material mined on the upper level to be transported from the lower
level.
A 30 foot winze is operable in the same areas as the raise. The winze accesses
the vein about 25 feet downdip from the upper level. The vein has been drifted
on for 60 feet to the south from the winze. A 14-foot cross cut connects the
main raise with the winze sub level. The main rise is open from the winze sub
level downward, for about 350 feet on the vein. The bottom 125 feet of the raise
above the lower level is plugged with mineralized material and muck as is that
above the upper level. The underground portion of the mineral property has
20-pound mine rail in good condition.
In the early 1980's, the Carson Mine was sold to Golden Lion Mining Corporation.
Golden Lion's work consisted of rehabilitation of the upper adit, construction
of a 30 foot winze in the upper adit, and limited stopping both above and below
track level in the upper workings. In 1986 and 1987, a 50 tons-per-day gravity
circuit mill was constructed on the mineral property. In 1988, Golden Lion
Mining Corporation leased the Carson Mine to the Ireland Mining Corporation,
which operated the Carson Mine to July of 1990 when it was acquired by the
Company.
On July 31, 1990, the Company acquired the Carson Mine, together with the
improvements, inventory and equipment located on the mineral property, from
Golden Lion Mining for a total consideration of approximately $2,299,000. The
consideration paid to Golden Lion Mining consisted of $50,000 cash, an $89,000
promissory note due August 15, 1990, 502,070 shares of common stock, and an
agreement to deliver 61.3 ounces of gold bullion by August 1, 1992. In addition,
Golden Lion Mining had forward sold 2,000 ounces of gold to four individuals. As
further consideration, the Company assumed Golden Lion Mining's forward sell
obligation by issuing a total of 781,072 shares of its common stock. Finally,
the Company issued 976,000 shares of common stock to Ireland Mining Corporation
in consideration for Ireland Mining Corporation terminating its lease and option
to purchase the mineral property with Golden Lion Mining.
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All of the unpatented claims in the mineral property package are in good
standing with assessment work documents for 1997 filed with both the BLM in
Sacramento and Sierra County in Downieville. However, a waste discharge permit
is required and a plan of operation must be filed with the U.S. Department of
Forestry before full scale mining may begin.
The Carson Mine previously had a 50 tons-per-day gravity flow mill and mill
housing which was in need of engineering and structural work to meet current
building codes. A large seven-bedroom cabin, a smaller cabin that has been
improved and a mobile home are currently located on the Carson Mine mineral
property. Although not currently planned for production in the next fiscal year,
when the Company does begin production at the Carson Mine it intends to mill the
mineralized material at the Ruby mill site. Power at the Carson Mine is supplied
by Pacific Gas and Electric Company, a public utility.
The upper level of the Carson Mine is fully supplied and operational for small
scale operations. Air and water lines are installed throughout and adequate
natural ventilation is assisted by a 12 foot fan. This level is serviced by a
925 foot traced adit, the entire length of which is open. A raise, which was
once open to the surface (125 ft.), is present about 600 feet in by the portal.
A north-south subdrift is present off the raise for 150 feet.
On July 24, 1990, the Company obtained from an independent mining laboratory 64
channel samples of mineralized material from the Carson Mine. Each sample
weighed approximately 25 pounds and had an average width of over 4.6 feet.
Samples taken yielded an overall uncut weighted average of 5.45 ounces of gold
per ton. These substantial-grade mineralized material shoots were tested in two
levels with a distance of 400 feet vertical separation. All of the assays
occurred within a strike length of 125 feet. On August 29, 1990, the Company
received confirmation of these substantial grades from a separate independent
mining laboratory. The confirmation report consisted of nine channel sample
checks of mineralized material taken from the Carson Mine. Although no
assurances can be given that these substantial grades will continue through the
length of the entire vein, the strike length potential of this vein is believed
to be 4,100 feet and is thought to extend into additional ground currently
controlled by the Company. In order to determine the magnitude of its discovery
and to evaluate its findings further the Company has completely mapped and
sludge drilled the vein system in the exposed portions of the Carson vein.
Because the Company decided to begin production at the Ruby Mine, the Company
postponed further development at the Carson Mine.
The Company also has 16 lode claims named the BC Claims which are located on the
northern border of the Carson Mines. The Company owns this mineral property
subject to the General Mining Law of 1872. The Company acquired its interest in
1990. There are no proven or probable reserves at this mine at this time. The
Company's original cost was $4,500. The mine is currently idle. Regulatory
requirements before the mine is operational are: Approved Plan of Operations
from US Forest Service; Waste Discharge Permit from California Water Quality
Control Board; California Dept. of Fish and Game Approval; Northern Sierra Air
Quality Board Approval. The Company fully intends to operate this mine. Current
costs to repair and maintain idle status is $3,000.
HIGH COMMISSION MINE.
The Company owns the mineral property subject to the General Mining Law of 1872.
The company acquired its interest in September 1990. There are no proven or
probable reserves at this mine at this time. The Company's original cost was
50,000 shares of common stock and $30,000. The mine is currently idle.
Regulatory requirements before the mine is operational are: Approved Plan of
Operations from US Forest Service; Waste Discharge Permit from California Water
Quality Control Board; California Dept. of Fish and Game Approval; Northern
Sierra Air Quality Board Approval. The Company fully intends to operate this
mine. Current costs to repair and maintain idle status is $3,000.
As stated above, in September of 1990, the Company entered into an agreement to
purchase the High Commission Mine for 50,000 shares of the Company's common
stock and $30,000 in cash. The Company's investment in this mineral property is
$101,875 at June 30, 1998, consisting of $101,875 of land. All previously
capitalized development costs have been expensed in the Consolidated Statement
of Operations for the fiscal year ended June 30, 1997 as a cumulative effect of
a change in accounting principle. See "Description of Business" under Part I,
Item 1.
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The High Commission Mine is located in the Allegheny-Forest-Downieville mining
districts in Sierra County, California, approximately one-half to two miles
northeast of Downieville. The High Commission Mine is an underground mine and
consists of 22 unpatented lode claims comprising 440 acres and five unpatented
placer claims comprising 500 acres. The unpatented claims in the mineral
property package are in good standing with assessment work documents filed with
both the BLM in Sacramento and Sierra County in Downieville. Its current
configuration is a consolidation of four past producing gold mines.
The High Commission Mine was discovered in 1888 and produced approximately 1,234
ounces in a bunch of arsenopyrite from the sinking of an 18-foot shaft. In
addition, approximately 177 ounces were produced about 1914.
Three veins were developed on the mineral property, the High Commission, Big
Ledge, and Mexican. The High Commission has a 280-foot tunnel with a quartz vein
averaging 4.5 feet and carries free gold and arsenopyrite. The strike was over
three miles on the surface. The Big Ledge vein is 11 feet wide, carries free
gold and no sulphide, and parallels the High Commission vein. The subsequently
developed Mexican vein parallels and is 300 feet in length. Both tunnels were in
pay shoots, with open cuts occurring over 900 feet. Quartz fissure veins occur
along a slate foot wall and porphyry hanging wall contact which carry free gold,
arsenopyrite and pyrite mineralized material. The veins vary from two to fifteen
feet in width and the parallel vein 40 feet west averages four to five feet in
width. The strike is north, dips 70 to 80 degrees east, and has a length on
surface of 3,000 feet.
The geology of the mineral property consists mainly of the Calaverous Formation,
Carboniferous Period, comprised of slate, quartzite and porphyry. The quartz
veins carrying the free gold mineralized material occur along the porphyryslate
contact within a 300 to 400-foot shear zone associated with the Melonese Fault
Zone. The High Commission, Big Ledge and Mexican veins all occur within this
wide contact rock formation. The veins vary from a few inches up to 20 feet in
width, striking mainly a north-south direction and dipping 70 to 80 degrees
east. Another vein formation strikes northeast and dips 60 degrees northwest.
The zone appears to be altered and mineralized.
The High Commission Mine is accessible by State Highway 49. The mineral property
will require on-site generators for power. Because of the Company' focus on the
Ruby Mine, the Company has put the High Commission on a care and maintenance
program.
KATE HARDY MINE.
Pursuant to an interest acquired in 1992, the Company leases the Kate Hardy Mine
with an option to purchase it for $1,500,000. The Company pays $10,500 per
month as an option payment. There are no proven or probable reserves at this
mine at this time. The Company's cost was 2,330,000 shares of common stock
valued at $74,897 and the assumption of $175,193 in liabilities. This mine is
currently idle. The regulatory requirements for this mine are: Use Permit with
the lead agency, Sierra County; Plan of Operations with the US Forest Service;
Waste Discharge Permit from California Water Quality Control Board; Approval of
California Department of Fish and Game; Approval from Air Resources Board of
Northern California. The Company fully intends to operate this mine. Annual cost
of repairs and maintenance is approximately $15,000.
The Kate Hardy Mine was discovered in 1860 and is an underground lode gold mine
located in Sierra County, California, and is approximately three miles south of
the Brush Creek Mine. The Kate Hardy Mine consists of two patented claims
comprising approximately 42 acres and 15 unpatented claims comprising
approximately 320 acres. The Company has no investment in this mineral property
at June 30, 1997. All previously capitalized development costs and land options
have been expensed in the Consolidated Statement of Operations for the fiscal
year ended June 30, 1997 as a cumulative effect of a change in accounting
principle. See "Description of Business" under Part I, Item 1.
All of the unpatented claims in the mineral property package are in good
standing with assessment work documents for 1997 filed with both the BLM in
Sacramento and Sierra County in Downieville. The Kate Hardy Mine has no permits
for mining operations.
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In 1957, Richmond Flatland, Sr. acquired the Kate Hardy Mine. In the mid to late
1970's, various attempts were made to rehabilitate the Kate Hardy Mine. On June
30, 1992, the Company entered into a lease effective March 23, 1992, in the form
of a mining option agreement for a term of five years expiring March 22, 1997.
The Company paid a $50,000 payment (initial option payment) upon the execution
of the agreement; and during the term of the lease, must pay $5,500 per month
for each month during the first year; $6,500 per month during the second year;
$7,500 per month during the third year; $8,500 per month during the fourth year;
and $9,500 per month during the fifth year. In addition, the Company must pay a
6% net smelter royalty on all minerals produced. The option purchase price for
the mine is $1,500,000 less 75% of all option payments paid up to a maximum of
$750,000.
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The Kate Hardy Mine contains a quartz vein on a reverse fault. The vein is
traceable along the surface for approximately 1,500 feet and disappears under
tertiary lava both to the north and the south. The vein varies in width from a
few inches to over 55 feet. Dykes of gabbro and serpentine cut the vein
irregularly. Considerable slate has been replaced by carbonate close to, and
within, the vein. Mariposite is erratic in distribution and is not necessarily
confined to the exposed serpentine zones. Historically, the best gold production
has come from the foot wall and hanging wall portions of the vein. The vein core
is largely barren bull quartz. Sulphide minerals associated with gold in the
vein include arsenopyrite, pyrite, galena and trace sphalerite.
Development has been carried out over 2,700 feet of strike length on the
Principal No. 1 North and South Drifts. The vein has been developed on five
levels, two of which are accessed by an internal shaft. Stopping has been
carried out with three principal mineralized material over a vertical range of
600 feet.
The Kate Hardy mine has been in a care and maintenance level since 1975. The
site has a 100 tons-per-day gravity flow mill which requires some upgrading and
repair. The underground workings in the south adit are in fair condition with
appropriate 20-pound mine rail and all electrical and ventilation utilities
installed. The north adit is caved-in for approximately 75 feet and will have to
be rehabilitated with new timbering before access to the north section of the
mineral property is permitted. There is a corrugated mill building in fair
condition and an equipment building in fair condition on the mineral property.
The Company has been permitted to dewater the mine. This will allow the Company
access to approximately 16,000 tons of mineralized material and will enable the
Company to explore the O'Donnell winze and the five existing mineralized
material shafts.
The Kate Hardy Mine is accessible by Mountain House Road, a graveled road. Power
is supplied by Pacific Gas and Electric Company, a public utility.
On March 23, 1997, the Company's lease on the Kate Hardy mine expired.
Subsequently, the Company entered into an agreement with the owners of the Kate
Hardy mine to extend the lease through September 18, 1998. The Company owes the
lessor approximately $265,000 in past due lease payments and related interest.
The lessor has indicated this agreement ended on September 18, 1998, but would
be available to work with the Company after that date if financing becomes
available.
OMEGA MINE.
The Omega Mine is an underground drift placer mine in Sierra County, California,
and is contiguous with the Kate Hardy Mine and is covered by the Kate Hardy
lease referred to above. The Omega mine consists of seven unpatented claims
comprising approximately 440 acres.
All claims in the mineral property package are in good standing with assessment
work documents for 1997 filed with both the BLM in Sacramento and Sierra County
in Downieville. However, a waste discharge permit is required and a plan of
operation must be filed with the U.S. Department of Forestry before full scale
mining operation may begin. The Company has no current plans to obtain such a
permit or file such a plan.
The Omega Mine was active during the 1920's and 1930's when a labyrinth 9 of
tunnels exceeding 2,000 feet was driven in the underlying serpentine mainly in
pursuit of high grade pay streaks. Raises were driven to access stopping areas
in the gravel. In 1957, Richmond Flatland, Sr. acquired the Omega mine. There
was no activity on the claims until 1980, at which time the underground workings
were completely remapped. Most of the gravel was found to be of igneous origin
containing a small percentage of white quartz cobbles. Cobbles vary from a few
inches to twelve inches in diameter and are tightly cemented by sand and silt.
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Before any production may begin at the Omega Mine, the underground workings will
have to be retimbered. There is no equipment at the mine site at the present
time.
The Omega Mine is accessible by Mountain House Road, a graveled road. Power is
supplied by Pacific Gas and Electric Company, a public utility.
NEW CALIFORNIA PLACER MINE - SIERRA COUNTY, CALIFORNIA.
In February 1997, the Company entered into an exploration license and option to
purchase the New California Mine for 20,000 shares of the Company's restricted
stock and $10,000 payable annually for up to a three year period. The purchase
price is $250,000 should the Company decide to exercise that option under the
agreement. There are no proven or probable reserves in this mine at this time.
The New California Mine is an unpatented placer mine containing approximately
800 acres of land and is located between Poker Flat and Gardner's Point. The
unpatented claims are in good standing. While the mine is currently idle,
regulatory requirements before mine is operational are: Approved Plan of
Operations from US Forest Service; Waste Discharge Permit from California Water
Quality Control Board; Northern Sierra Air Quality Board Approval; California
Dept of Fish and Game Approval. The Company fully intends to operate this mine.
Current costs of repair and maintenance are $2,000.
WILBANK'S PLACER AND LODE MINE.
In March 1997, the Company entered into an exploration license and option to
purchase the Wilbanks claims for a $10,000 cash payment and $1,000 per month
during the option period. The purchase price is $200,000 should the Company
exercise that option. The Company has, under the terms of the agreement, an
additional five year term to purchase the mineral property for $300,000 payable
at $2,000 per month. There are no proven or probable reserves on the mineral
property at this time.
The Company's original cost was $10,000. While the mine is currently idle,
regulatory requirements before mine is operational are: Approved Plan of
Operations from US Forest Service; Waste Discharge Permit from California Water
Quality Control Board; Approval from California Dept of Fish and Game; Approval
from the Northern Sierra Air Quality Board. The Company fully intends to
eventually operate this mine. Current costs to repair and maintain this mine
idle is $1,500.
The mineral property contains approximately 46 acres of land and is
strategically located in the diamond exploration center of the Poker Flat Mining
District. There are three unpatented placer claims and one unpatented lode
claim, and all are in good standing with the Bureau of Land Management. The
Company is exploring for diamonds, and not for gold, in this mining district.
THE POKER FLAT DISTRICT: (DIAMOND POTENTIAL).
In 1872, two diamonds were recovered from Brush Creek's Garner's Point mineral
property and one diamond was cut into a one carat stone. These two diamonds were
recovered from a 109 square foot area of a 30 foot thick section of the
paleoplacer gold deposit. A diamond was recovered from hydraulic tailings in
Slate Creek, adjacent to the west side of Gardner's Point.
Based upon historical data and other relevant information, the Company hired a
consulting geologist who sampled the drainage areas around Gardner's Point and
proceeded to take stream sediment samples and rock chip samples for diamond
indicator minerals. Initial results of the samplings were positive. The Company
staked 199 unpatented lode mining claims in the old mining district of Poker
Flat. Over a three month period the Company performed additional sampling and
testing for diamond indicator minerals, and recent results have continued to be
encouraging.
The Company owns the mineral property subject to the General Mining Law of 1872.
The Company acquired its interest in 1997 when it staked its unpatented lode
mining claims. There are no proven or probable reserves on the mineral property
at this time.
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<PAGE>
The Company's original cost was $60,000. While the mine is currently idle,
regulatory requirements before mine is operational are: Approved Plan of
Operations from US Forest Service; Waste Discharge Permit from California Water
Quality Control Board; Approval from California Dept of Fish and Game; Approval
from the Northern Sierra Air Quality Board. The Company fully intends to
eventually operate this mine. Current costs to repair and maintain this mine
idle is $5,000.
The Company phase exploration program is complete. The Company is attempting to
negotiate a joint venture with certain diamond mining companies to continue the
exploration and development of the mineral property.
UNPATENTED MINERAL PROPERTY INTERESTS.
The Company occasionally acquires rights to explore for and produce minerals on
federally owned lands and paid all required fees to maintain the unpatented
claims. The Company acquires these rights through the acquisition of previously
located mining claims from the claimant or through the location of unpatented
mining claims upon unappropriated federal land pursuant to procedures
established by the General Mining Law of 1872, the Federal Land Policy and
Management Act of 1976, and various state laws. These referenced laws generally
provide that a citizen of the United States, including a corporation, may
acquire a possessory right to explore for and to develop and produce valuable
mineral deposits discovered upon unappropriated federal lands, provided that
such lands have not been withdrawn from mineral location. Withdrawn lands would
include, for example, lands included in national parks and military reservations
and lands designated as part of the National Wilderness Preservation System
(NWPS).
The location of a valid mining claim on federal lands requires the discovery of
a valuable mineral deposit, the erection of appropriate monuments, the posting
of a location notice at the point of discovery, the marking of the boundaries of
the claim in accordance with federal law and the laws of the state in which it
is located, and the filing of a notice or certificate of location and a map with
the BLM and the real property recording official of the county in which the
claim is located. Failure to follow the required procedures may render the
mining claim void. If the statutes and regulations for the location of a mining
claim are complied with, the locator obtains a valid possessory right to explore
for, develop and produce minerals from the claim. This mineral property right
can be freely transferred and is protected against appropriation by the
government without just compensation. Also, the claim locator acquires the right
to obtain a patent (or deed) conveying fee title to his claim from the federal
government upon payment of fees and compliance with certain additional
procedures.
Unpatented mining claim interests possess certain unique vulnerabilities not
associated with other types of property interests. For example, in order to
maintain each unpatented mining claim, the claimant must annually perform not
less than $100 worth of work or improvements on or for the benefit of the claim
and must file with state and federal authorities an affidavit attesting to the
performance of such work. Although currently not a requirement, the Company
feels it should continue to file proofs of labor to prevent adverse claimants
from occupation of the claim and to have a proper chain of title should the
Company decide to apply for patents. In addition, the Bureau of Land Management
currently assesses a $100 per claim rental fee which, if not paid annually
before August 31 of each year, invalidates the unpatented claims. Failure to
perform such work will render the claim subject to relocation by third parties
and constitutes abandonment of the claim. Further, because mining claims are
often located with less then sophisticated surveying techniques, great
difficulty may arise in determining the validity and ownership of specific
mining claims. Moreover, under applicable regulations and court decisions, in
order for unpatented mining claims to be valid against a governmental challenge,
the claimant must be able to prove that the mine on which the claim is based can
be mined at a profit. Thus, it is conceivable that, during times of declining
metal prices, claims that were valid when located could be invalidated by the
federal government.
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Item 3. LEGAL PROCEEDINGS.
During fiscal 1996, the Company entered into two significant settlement
agreements involving claims made by Zuri Invest A.G., et al. and the Royal Bank
of Scotland, et al. which in effect resolved all material litigation against the
Company. The terms of the settlement with the Royal Bank were amended in fiscal
1997.
THE ZURI INVEST ACTION.
During the fiscal year ended June 30, 1997, the Company completed its
obligations to the Zuri Plaintiffs (as defined below) under a settlement
agreement entered into on December 14, 1995 (the "Zuri Agreement") with Zuri
Invest A.G., Andre Michaels and Peter Woodfield (the "Zuri Plaintiffs"), in
connection with an action which had been commenced in December 1991 (the "Zuri
Invest action"), to partially satisfy the joint and several judgment entered in
the Zuri Invest action against the Company and Simone Anderson and James
Anderson (collectively, the "Andersons") on October 31, 1995 (the "Judgment").
The Zuri Plaintiffs agreed, subject to the receipt of the consideration
described below, not to seek any further recovery directly from the Company on
the Judgment, and to release the Company from any further liability thereunder.
The Zuri Plaintiffs also agreed not to pursue recovery against the Andersons on
the Judgment if it is judicially determined that the Andersons have
indemnification rights against the Company with respect to the Judgment. The
Company issued and delivered to each of Woodfield and Michaels 250,000 shares of
the Company's Common Stock. The Company issued 600,000 shares of the Company's
Common Stock to Zuri Invest and delivered 200,000 of such shares to Zuri Invest
on or about April 10, 1996, 200,000 shares on or about June 11, 1996, and the
remaining 200,000 shares on or about September 9, 1996. As security for the
Company's obligations to issue and deliver the above described shares of Common
Stock, the Company issued a promissory note in the amount of $1.2 million
payable to the Zuri Plaintiffs. The note was secured by a deed of trust on all
real property and patented and unpatented mining claims owned by the Company.
Pursuant to the Zuri Agreement, the principal amount of the note shall be
reduced as the shares issued to the Zuri Plaintiffs are sold, dollar for dollar
by the gross proceeds generated from such sales until such time as sales
collectively total in gross $1.2 million at which time the note shall be deemed
paid. Notwithstanding the foregoing, the note shall also be deemed paid after
the passage of 180 days after the last distribution of shares which, as stated
above, was distributed in September 1996. As a result thereof, such note has
been deemed paid by the Company.
Pursuant to the Zuri Agreement, the Company also assigned to the Zuri Plaintiffs
an interest (33% of the Company's 60% interest) in claims asserted against the
Andersons and their controlled corporations in the action entitled Brush Creek
Mining and Development v. F. James Anderson, et al., currently pending in the
United States District Court, Northern District of California.
THE ROYAL BANK ACTION.
On December 13, 1995, the Company entered into an agreement (the "Royal Bank
Agreement") to settle an action commenced by the Royal Bank of Scotland, et al.
by delivering to the plaintiffs in such suit (the "Royal Bank Plaintiffs")
216,667 shares of the Company's Common Stock and cash in the amount of $241,000.
The Company also assigned to the Royal Bank Plaintiffs a portion of its interest
in any total recovery from claims against the law firm formerly known as Bartel,
Eng, Miller & Torngren, the Company's formal legal counsel ("Bartel, Eng"). On
December 13, 1996, the
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<PAGE>
Company was further required to deliver to each of the Royal Bank Plaintiffs, at
his or her option, additional shares of the Company's common stock or additional
cash. The number of shares of Common Stock or the amount of cash each Royal Bank
Plaintiff would be entitled to receive is based on the amount of his or her pro
rata interest in amounts paid by the Company pursuant to the Royal Bank
Agreement. If all Royal Bank Plaintiffs would elect to receive Common Stock, the
Company would be required to issue and deliver a maximum of 300,000 shares in
the aggregate and if all Royal Bank Plaintiffs elect to receive cash, the
Company would be required to deliver cash in the maximum aggregate amount of
$600,000.
Prior to December 13, 1996, the Royal Bank Plaintiffs elected to receive
$600,000 in cash pursuant to the term of the Royal Bank Agreement. On or about
December 17, 1996, the Company received notice from the Royal Bank Plaintiffs
that the Company was in default of its obligation to pay them $600,000 on
December 13, 1996. Under the Royal Bank Agreement, such default caused the
Company to incur an immediate $3.25 million debt to the Royal Bank Plaintiffs.
Subsequently, in January 1997, the Company entered into a Forbearance Agreement
(the "Forbearance Agreement") with the Royal Bank Plaintiffs which provided that
notwithstanding the $3.25 million obligation, the Royal Bank Plaintiffs will
forbear from exercising their rights and remedies against the Company provided
the Company makes a payment of $629,100 on or before March 20, 1997 and a
payment of $175,000 on or before July 1, 1997. The Company has the option to
postpone the second payment ($175,000) by delivering written notice to the Royal
Bank Plaintiffs no later than June 25, 1997 whereupon the second payment shall
be paid no later than December 15, 1997 and the amount shall be increased to
$250,000. The Company also agreed to reimburse the Royal Bank Plaintiffs for
their attorney fees and costs. Thereafter, the Royal Bank Plaintiffs agreed to
extend the time period for paying the $629,100 to them until May 15, 1997. In
addition, the second payment was increased to $225,000 to be payable July 1,
1997 provided it may be postponed until December 15, 1997 in which event the
amount shall be increased to $300,000. The amount which was due May 15, 1997 was
not paid by such date. However, as of June 2, 1997, the Company entered into an
Amendment No. 2 to the Forbearance Agreement ("Amendment No. 2") which, among
other things, provided that the Royal Bank Plaintiffs shall continue to forbear
from exercising its rights and remedies under the Royal Bank Agreement and
related Forbearance Agreement, provided the Company performs the following: (a)
pay $896,000 in eight installments of $112,000 each on May 31, July 31,
September 30 and November 30, 1997 and January 31, March 31, May 31 and July 31,
1998 (the "Periodic Payments"), (b) pay $250,000 on or before September 30,
1998, (c) makes payments of $25,000 within five business days after any
closing(s) since March 20, 1997, of any single or series of sale-leaseback
transaction(s) which the Company shall have received in the aggregate of at
least $65,000 in proceeds, and (d) makes a final payment on or before September
30, 1998 of the Judgment Amount (as defined in the Forbearance Agreement) less
the aggregate amount of the Periodic Payments previously paid, provided,
however, that if the Company has timely performed its obligations under its
settlement documents with the Plaintiffs and either (i) Plaintiffs have received
all of the Periodic Payments, or (ii) the Company makes one final payment in an
amount set forth in Amendment No. 2 which amount ranges from $950,000 if such
final payment is paid on or before May 31, 1997 to $350,000 if such final
payment is paid after May 31, 1998 and on or before July 31, 1998 (and assuming
all Periodic Payments coming due prior to the final payment has been made), and
in such event the Plaintiffs shall waive the enforceability of the Judgment
Amount against the Company and no further payments shall be required of the
Company. In addition, the Company has agreed that upon the execution of a Joint
Venture Agreement, the Company shall pay the final payment within 90 days after
the earlier of the date such joint venture is signed or effective date of a
Joint Venture Agreement. The Company has paid all Periodic Payments due to date.
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<PAGE>
The Company has also agreed to issue 433,334 shares (the "Forbearance Agreement
Shares") of its Common Stock to the Royal Bank Plaintiffs. The Company has
agreed to register such shares for resale pursuant to a Registration Statement
to be filed with the Securities and Exchange Commission. Also, the Company has
agreed to issue to the Plaintiffs, from time to time until the payments referred
to above have been completed, .025 shares of its Common Stock for each share
issued in excess of 24,000,000 of the Company's outstanding shares. Amendment
No. 2 also provides that the Company reimburse Plaintiffs for attorneys' fees
and costs incurred in connection with the preparation and negotiation of
Amendment No. 2.
The Company's obligations under the Royal Bank Agreement are secured by (1) a
deed of trust on all real property and patented and unpatented mineral claims
owned by the Company; (2) a first priority security interest in all of the
Company's right, title and interest in and to any and all goods, products,
yield, receivables, inventory (including any gold from any mines), any and all
exploration and drilling information, data, maps, reports or surveys, and any
and all income and proceeds derived from the Company's mining operations on
property which the Company presently or subsequently owns or leases; (3) a
first-priority security interest in the Company's right, title and interest in
and to any total recovery by the Company on the claims against Bartel, Eng; and
(4) a stipulated judgment in the amount of $3,250,000.
Subsequently, the Company, after verbally agreeing with Sterling's negotiators
regarding the final two payments to be made under the Royal Bank Agreement to
occur in January and July 1998.
In fiscal 1996, the Company registered the 1,616,667 shares of Common Stock to
be issued and delivered pursuant to the Zuri Agreement and the Royal Bank
Agreement, which included the 300,000 additional shares that may have been
issued pursuant to the Royal Bank Agreement as described above. This number does
not include the Forbearance Agreement Shares (as described above).
THE ANDERSON MATTER.
The Company was plaintiff in the matter of Brush Creek Mining and Development
Co., Inc. v. Anderson, et al., United States District Court, Northern District
of California, case no. C94-3487 CAL, filed on September 24, 1994. The action
was against former officers and directors of the Company and others for
violations of federal and state securities laws and common law torts. On April
3, 1998, the Company's counsel, the Hinton & Alfert firm, withdrew as counsel of
record. Upon the Company's failure to obtain new counsel as directed by the
Court, the action was dismissed with prejudice on May 15, 1998. Following entry
of judgment of dismissal, two of the defendants moved as purported prevailing
parties for an award of attorney's fees and costs incurred in defending against
the Company's claims. The defendants sought by their motion to recover
$63,782.14. The Company retained this firm for the limited purpose of opposing
this motion. On August 21, 1998, the Court denied the defendants' motion.
Defendants have appealed this order, but this firm is no longer representing the
Company in regard to this matter.
THE VOLCANIC MATTER.
Volcanic Resources, LLC filed its complaint against the Company, its past CEO
and Chairman of the Board, and two of its Board members on August 12, 1998. On
September 16, 1998, Plaintiff filed its First Amended Complaint alleging breach
of contract and breach of express warranties against the Company only and
alleging fraud, negligent misrepresentation, rescission, constructive trust,
declaratory relief and violation of Business and Professions Code section 17200
against all Defendants. The underlying contract giving rise to this suit
involves a written Exploration, Development and Mine Operating Agreement entered
into November 20, 1997 between Sterling Mining, LLC and the Company. Sterling
Mining, LLC assigned its rights under the Exploration, Development and Mine
Operating Agreement to Plaintiff. The responsive pleading is due November 30,
1998. In accordance therewith, the individual Defendants are filing three
preliminary "motions": (1) Motion to Change Venue; (2) Demurrer; and (3)
Petition to Compel Arbitration. These motions are set for hearing on December
30, 1998.
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<PAGE>
OTHER MATTERS.
In fiscal 1996 and 1997, the Company was requested pursuant to a non-public
informal inquiry by the staff of the Securities and Exchange Commission, to
provide information to the staff of the Commission regarding the Company's
financing activities in reliance upon Regulation S under the Securities Act. The
Commission advised the Company that the inquiry should not be construed as an
indication by the Commission or its staff that any violations of law have
occurred, nor should it be considered a reflection upon any person.
On October 24, 1994, the Company filed an amended complaint against F. James
Anderson, Simone Anderson, Edward M. Lawson, Consolidated Sierra Gold Mines,
Inc. ("CSGM"), Independent Sierra Gold Mines, Inc. ("ISGM"), Bartel, Eng, Miller
& Torngren, attorneys, Robert Sibthorpe, Coopers & Lybrand and Yorkton
Securities as defendants in an action to recover damages. The suit was filed in
the United States District Court for the Northern District of California as Case
No. C94-3487 (the "Federal Action"). On April 28, 1995, the Company filed a
third amended complaint which seeks to recover damages against James and Simone
Anderson for breach of fiduciary duty, for violations of Rule 10b-5 and 16(b),
and for violations of California Corporations Code Section 25400(d) and Section
25401. The lawsuit seeks to recover damages against Edward M. Lawson, Robert
Sibthorpe and Yorkton Securities, Inc. for breach of fiduciary duty. The lawsuit
seeks to recover damages against James and Simone Anderson, ISGM, CSGM, Robert
Sibthorpe, and Yorkton Securities, Inc. for intentional and negligent
misrepresentation. The lawsuit seeks to recover damages against the firm of
Bartel, Eng, Miller & Torngren based upon breach of fiduciary duty and
negligence claims. The law firm of Bartel, Eng, Linn & Schroder has (as
successor in interest to Bartel, Eng, Miller & Torngren) filed a counterclaim in
this litigation seeking recovery from the Company of legal fees totaling
approximately $95,000. The accounting firm of Coopers & Lybrand has been
dismissed as a defendant from the litigation without prejudice.
As to the progress of the case to date, an initial round of discovery has been
completed. On November 15, 1996, the court granted defendants Yorkton Securities
and Robert Sibthorpe's Motion for Summary Judgment. Subsequent to entry of
summary judgment in their favor, Yorkton Securities filed a cost bill for the
sum of $15,752.85 and Mr. Sibthorpe filed a cost bill for $3,842.83. These costs
are not payable until the conclusion of the litigation against all other
parties. The insurer for Bartel, Eng, Miller & Torngren is in liquidation
proceedings under the control of the California Department of Insurance. The
Company intends to file a claim in that liquidation proceeding when claim forms
are issued. The court has set a trial date for the remaining parties of November
24, 1997.
On February 8, 1996, the Company filed a complaint against F. James Anderson and
Simone Anderson in Superior Court of the State of California, in and for the
County of Sacramento, Case No. 96AS 00513 (the "Sacramento Action"). The
complaint seeks (a) judicial determination and declarations that the Company (1)
has no further obligations to advance defense fees and costs incurred by the
Andersons in connection with the Zuri litigation, including on the Andersons'
appeal of that judgment (which fees and costs the Company agreed to pay pursuant
to a settlement in a previously resolved matter); (2) is entitled to recoup
defense fees and costs allocable to the Andersons' defense of claims in the Zuri
Invest litigation for which they were found liable; (3) is not required to
indemnify the Andersons for their liability in the Zuri Invest litigation; (4)
has no duty or obligation to the Andersons to account for, replenish, and/or
return monies to or pay interest on the $200,000 provided by the Andersons as
partial indemnification to the Company in connection with the Royal Bank
litigation; and (5) is entitled to have all amounts returned to the Company from
the $200,000 which were disbursed for the purposes other than to indemnify the
Company such that the Company receives the full net benefit of the $200,000, and
(b) equitable indemnification to collect from the Andersons their proportionate
share of the judgment in the Zuri Invest litigation.
On April 4, 1996, the Company was served with the Andersons' answer to the
Sacramento Action and their cross-complaint against the Company. The answer
generally denied the allegations of the Company's complaint and asserted various
affirmative defenses. The cross-complaint seeks judicial determination and
declarations that the Company (1) is obligated to advance the Andersons' defense
costs (including costs of appeal) in the Zuri litigation and defense costs in
the Federal Action and (2) is obligated to indemnify them from the judgment in
the Zuri Invest litigation and any judgment that might be rendered against them
in the Federal Action.
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Also, on April 4, 1996, the Company was served with a motion by the Andersons
for summary adjudication of two of their cross claims which would have forced
the Company to advance the Andersons' defense cost in the Zuri litigation and
the Federal Action. On May 3, 1996, the Andersons' motion was heard by the
superior court and denied.
The Company answered the Andersons' cross complaint on May 6, 1996 generally
denying the allegations and asserting various defenses. Although the Company has
not done so to date, the Company may attempt to amend its original complaint to
assert an additional claim to hold the Andersons liable for the entire amount of
the Royal Bank of Scotland settlement.
The Company is a party to other various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the business or financial position of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders.
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market and is
quoted on The Nasdaq SmallCap Market under the symbol BCMD.
The following table sets forth the range of the high and low bid quotations for
the Company's Common Stock for each period indicated during the fiscal years
ended June 30, 1998 and 1997. Prices are adjusted for 10:1 reverse stock split
on May 8, 1998.
<TABLE>
<CAPTION>
Bid Prices
-----------
High Low
------- ------
<S> <C> <C>
For the Fiscal Period 1998
- --------------------------
First Quarter. . . . . . . $ 5.625 $ 2.50
Second Quarter . . . . . . $15.625 $ 2.81
Third Quarter. . . . . . . $10.938 $4.375
Fourth Quarter . . . . . . $10.938 $1.406
For the Fiscal Period 1997
- --------------------------
First Quarter. . . . . . . $ 10.06 $ 6.30
Second Quarter . . . . . . $ 6.30 $ 1.30
Third Quarter. . . . . . . $ 3.10 $ 6.00
Fourth Quarter . . . . . . $ 4.40 $ 1.90
</TABLE>
The foregoing over-the-counter market quotations reflect inter-dealer prices,
without retail mark-ups, mark-downs or commissions and may not necessarily
represent actual transactions.
As of September 30, 1998 there were approximately 1,500 record holders of the
Company's Common Stock. The number of shares outstanding of the Company's Common
Stock as of September 30, 1998, was 5,554,179.
During the last two fiscal years of the Company, no cash dividends have been
declared or paid on the Company's Common Stock.
Other than unregistered sales of equity securities made in reliance on
Regulation S, during the fiscal year ended June 30, 1997, the Company sold the
following equity securities that were not registered under the Securities Act of
1933: 3,600,005 restricted shares of Common Stock at $.0625 per share wherein
the Company received net proceeds of $225,000 in January and February 1997;
6,600,000 restricted shares of Common Stock at $.07 per share wherein the
Company received net proceeds of $460,600 in February through May 1997;
1,754,545 restricted shares of Common Stock at $.11 per share wherein the
Company received net proceeds of $193,000 in May and June 1997; and 1,400,000
restricted shares of Common Stock at $.125 per share wherein the Company
received net proceeds of $175,000. All shares were sold under Regulation D and
Section 4(2). Investors who acquired such shares were required to be accredited
investors. The Company has agreed to register the shares pursuant to a
registration statement to be filed with the Securities and Exchange Commission.
In addition, in March 1997, the Company canceled all previously issued options
to directors and issued in place thereof 960,000 options exercisable at $.225
per share. Also, in fiscal 1997, the Company issued 20,000 restricted shares of
Common Stock, under Section 4(2) of the Securities Act of 1933, in connection
with the acquisition of the New California Placer Mine.
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<PAGE>
In October 1997, the Company sold 405,000 shares of its common stock pursuant to
a private placement at a price of $1.00 per share. The shares were sold pursuant
to Regulation D and Section 4(2). The Company received a net amount of $405,000
from the sale.
In November 1997, the Company issued 5,042 shares of its Common Stock for
certain consulting services. The shares were registered with the Securities and
Exchange Commission on Form S-8. The shares are valued at $11.72, the average of
the bid and asked price for the Company's Common Stock on November 4, 1997.
Also in November 1997, the Company sold 28,000 shares of its Common Stock
pursuant to a private placement at a price of $5.00 per share. The shares were
sold pursuant to Regulation D and Section 4(2). The Company received a net
amount of $140,000 from the sale.
Also in November 1997, the Company issued and caused to be released 15,000
shares of its Common Stock which had been in escrow in connection with an
investment transaction pursuant to Regulation S which occurred in September
1996. The shares are valued at $9.375, the average of the bid and asked price
for the Company's Common Stock on November 28, 1997.
In December 1997, the Company sold 44,000 shares of its Common Stock pursuant to
a private placement at a price of $5.00 per share. The shares were sold pursuant
to Regulation D and Section 4(2). The Company received a net amount of $220,000
for the sale.
Also in December 1997, the Company issued 15,667 shares of its Common Stock to
pay for certain finders fees. The shares were issued pursuant to Section 4 (2).
The shares are valued at $8.59375 the average of the bid and asked price for the
Company's Common Stock on December 2, 1997.
Also in December 1997, the Company issued 15,000 shares of its common stock to
pay for certain finders fees. The shares were issued pursuant to Section 4 (2).
The shares are valued at $11.5625, the average of the bid and asked price for
the Company's Common Stock on December 12, 1997.
Also in December 1997, the company issued 43,334 shares of its Common Stock as
part of a settlement with the Royal Bank plaintiffs. The shares are valued at
$10.00 the average of the bid and asked price for the Company's Common Stock on
December 31, 1997.
During the quarter ended March 31, 1998, the Company sold the following equity
securities that were not registered under the Securities Act of 1933: 5,000
restricted shares of Common Stock at $5.00 per share wherein the Company
received net proceeds of $25,000 in January 1998; 198,750 restricted shares of
Common Stock at $1.84 per share wherein the Company received net proceeds of
$365,700 in February 1998; 41,250 restricted shares of Common Stock at $1.84 per
share wherein the Company received net proceeds of $75,900 in March 1998. All
shares were sold under Regulation D and Section 4(2). Investors who acquired
such shares were required to be accredited investors. The Company has agreed to
register all the foregoing shares pursuant to a Registration Statement.
In addition, during the quarter ended March 31, 1998, the Company issued 333,333
restricted shares pursuant to Regulation S and received net proceeds of
$1,000,000.
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<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTION
During 1997, the Securities and Exchange Commission (SEC) staff reconsidered
existing accounting practices fro mineral expenditures by United States junior
mining companies. The SEC now interprets generally accepted accounting policy
for junior mining companies to permit capitalization of acquisition, exploration
and development costs only after persuasive engineering evidence is obtained to
support recoverability of these costs (ideally upon determination of proven
and/or probable reserves by a recognized independent engineer). Although the
Company has performed drilling samples, and an independent engineer has deemed
the gold properties contain profitable reserves in excess of property and
equipment costs incurred through June 30, 1997, management has chosen to follow
the more conservative method of accounting by expending the previously
capitalized gold mineral costs, other than with respect to Gardner's Point, as a
cumulative effect of a change in accounting principal in the consolidated
statement of operations included in the Company's Consolidated Financial
Statements. This resulted in an impairment charge of $5,39,3115 in 1997.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1997
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had a working capital deficit of $ 1,387,633, which
represents an increase in working capital of $ 945, 272 from the previous years
working capital balance of $2,332,905. This could be directly attributed to a
cash timing variable in comparison from the previous year, and a reduction in
accounts payable and current portion of long term debt compared to the prior
year.
Consistent with prior years, the mining industry continues to be a capital
intensive one. During the fiscal year ended June 30, 1998 the Company raised
approximately 6 million from the sale of shares of Common Stock and Subscribed
Common Stock. During the current year the company continued to have a working
capital deficit of $ 1, 387,633 and had no material revenues from mining
operations. Additional financing will be required as of June 30, 1998 for the
Company to cover its mining and development cost to continue to engage in full
scale mining operations. At this time the company has no definite plans
regarding additional financing, but the Company is certainly open to equity
financing via stock offerings or joint ventures. There are no assurances that
the company will be able to raise the type of capital, and even in such capital
is raised, there is no guarantee that it will be sufficient to satisfy the
Company's Capital intensive requirements. If the Company is unable to obtain
sufficient funds from future financing, the company may not be able to achieve
its business objectives and may have to scale back its development plans. In
addition, the Company may be required to seek protection under the bankruptcy
laws.
During the fiscal year 1998, the company is currently in default with respect to
certain mining properties, and certain county taxes. Although the lessors have
not taken action to foreclose on the leases the Company is making every effort
to fulfill these agreements. The company estimates that mining development and
operating cost to be approximately $ 4 million for the next fiscal year assuming
adequate financing becomes available. The majority of the funds will be used
for operations in the lower Brush Creek mine and Ruby mill, consistent with
prior year. There can be no assurance that the Company will be able to obtain
such financing or that financing will be obtained on terms favorable to the
Company.
-27-
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1996
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital deficit of $2,332,905, which
represents an increase in working capital deficit of $100,231 as compared to a
working capital deficit of $2,232,674 at June 30, 1996. The decrease in working
capital was primarily due to a decrease in available cash, an increase in
accounts payable and accrued liabilities partially offset by a decrease in
current portion of long-term debt.
The mining industry is capital intensive. During the fiscal year ended June 30,
1997, the Company raised $2,111,101 from the sale of shares of Common Stock. At
June 30, 1997, the Company had a working capital deficit of $2,332,905 and had
no material revenues from mining operations. Additional financing will be
required in order for the Company to cover its mining and development costs and
to engage in full scale mining operation. At this time, the Company has no
definitive plans regarding additional financing, but believes that it will
likely be obtained through equity financing such as stock offerings or joint
ventures. No assurances can be given that the Company will be able to raise cash
from additional financing efforts and, even if such cash is raised, that it will
be sufficient to satisfy the Company's capital requirements. If the Company is
unable to obtain sufficient funds from future financings and/or operations, the
Company may not be able to achieve its business objectives and may have to scale
back its development plans. In addition, the Company may be required to seek
protection under the bankruptcy laws.
During fiscal 1997, the Company sold equipment in order to meet some of its
obligations. In addition, the Company could lose some of its properties for
failure to make lease payments. On March 23, 1997, the Company's lease on the
Kate Hardy mine expired. However, the Company paid $10,000 to the Kate Hardy
lessor to extend the lease agreement on the Kate Hardy mine for an additional
three months. The Company is required to pay an additional $10,000 to extend the
lease for another three month period. The Company also negotiated a modification
agreement with Ruby Development Co., Inc. to pay, in cash, one lease payment in
arrears for the Ruby mine, to pay in cash, one month lease payment in arrears
for the Rising Sun, increase the amount of equipment held as collateral pursuant
to the Ruby mine lease agreement by filing a UCC-1 financing statement listing
the additional equipment, all right, title and interest of certain "ore
specimens" for which Ruby Development Co., Inc. will credit the value against
past due minimum royalty payments, and grant Ruby Development Co., Inc., an
option to purchase up to 50,000 shares of the Company's common stock at price of
$.25 per share until July 1, 1999.
The Company estimates its mining development and operating costs to be
approximately $4 million for the fiscal year ending June 30, 1998. The majority
of the funds will be used for operations in the lower Brush Creek mine and Ruby
mill. Additional financing will be required to perform the intended work. There
can be no assurance that the Company will be able to obtain such financing or
that financing will be obtained on terms favorable to the Company.
-28-
<PAGE>
RESULTS OF OPERATIONS
The Company had total revenues of $22,266 (from interest only) during fiscal
1997 compared to total revenues of $42,160 (from interest only) during fiscal
1996. The Company had no revenues from operations during fiscal 1997 and 1996.
The Company had a $4,288,420 net loss for the fiscal year ended June 30, 1997,
compared to a net loss of $9,270,102 for the fiscal year ended June 30, 1996.
This change in net loss is primarily due to a reduction in general and
administrative expenses, general mining and exploration and a reduction in
expenses due to litigation settlement.
Item 7. FINANCIAL STATEMENTS.
See the Consolidated Financial Statements annexed to this report.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-29-
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT.
There is incorporated by reference herein information which will be contained in
the Company's definitive proxy statement to be filed within 180 days of the
Company's year end in connection with the annual meeting of shareholders to be
held in fiscal 1999.
Item 10. EXECUTIVE COMPENSATION.
There is incorporated by reference herein information which will be contained in
the Company's definitive proxy statement to be filed within 180 days of the
Company's year end in connection with the annual meeting of shareholders to be
held in fiscal 1999.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There is incorporated by reference herein information which will be contained in
the Company's definitive proxy statement to be filed within 180 days of the
Company's year end in connection with the annual meeting of shareholders to be
held in fiscal 1999.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There is incorporated by reference herein information which will be contained in
the Company's definitive proxy statement to be filed within 180 days of the
Company's year end in connection with the annual meeting of shareholders to be
held in fiscal 1999.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
<C> <S>
3.1 Articles of Incorporation of the Company with Amendments thereto.(1)
3.2 Amended and Restated Bylaws of the Company.(1)
4.1 Specimen Certificate for the Company's common stock.(1)
4.2 Form of Warrant Agreements.(1)
10.1 Voting Agreement between the Company, Simone M. Anderson and EuroCanadian
Securities Limited.(1)
10.2 Agency Agreement between the Company and Euro Canadian Securities Limited.(1)
10.3 Stock Purchase Agreement between the Company, Simone M. Anderson and Euro
Canadian Securities Limited.(1)
10.4 Merger Agreement and Plan of Reorganization between the Company, Sierra Gold
Properties, Inc. and California Properties, Ltd.,and Addendum thereto.(1)
10.5 Lease Purchase Agreement for the Ruby Mine, and Modifications thereto.(1)
10.6 Modification of Lease Purchase Agreement for the Ruby Mine dated November 1, 1994.(7)
10.7 Agreement to Lease with Option for the Rising Sun Mine, and Modifications thereto.(1)
10.8 Agreements to Purchase Carson Mine.(1)
10.9 Agreement to Purchase High Commission Mine.(1)
10.11 Promissory Note between the Company and Consolidated Sierra Gold Mines, Inc.(1)
10.12 Promissory Note between the Company and Independent Sierra Gold Mines, Inc.(1)
10.13 Consulting Agreement between the Company and Consolidated Sierra gold Mines, Inc.(2)
10.14 Revolving Credit Facility between the Company and Consolidated Sierra Gold Mines, Inc.(1)
10.15 Stock Option Agreements for G. Michael Pickering.(1)
10.17 Credit Facility Agreement between the Company and Epsom Investment Services N.V.(1)
10.18 Settlement Agreement between the Company, Simone Anderson, Euro Canadian Securities
Limited, and Georges Benarroch.(1)
</TABLE>
-30-
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.19 Agency Agreement between Epsom Investment Services N.V. and the Company.(1)
10.20 Letter Agreement with Grande Portage.(1)
10.21 Letter Agreement with the All-Union Research Institute of Geology of Foreign
Countries (VZG).(1)
10.22 Contract for Services between the Company and F. James Anderson.(7)
10.23 Stock Option Agreement with Simone Anderson.(7)
10.24 Stock Option Agreement with G. Michael Pickering.(7)
10.25 Stock Option Agreement with Edward Lawson.(7)
10.26 Stock Option Agreement with Susan Miller.(7)
10.27 Stock Option Agreement with Michael Skopos.(7)
10.28 Stock Option Agreement with Dave Trueman.(7)
10.29 Stock Option Agreement with Peter LeCoutier.(7)
10.30 Lease on the Kate Hardy - Omega Mines.(3)
10.31 Letter of Agreement with Morrison Knudsen.(4)
10.32 Joint Venture Agreement with MK Gold Company.(5)
10.33 Modification of Lease Purchase Agreement for Rising Sun Mine dated November 1,
1994.(7)
10.34 Letter agreements regarding option to lease Dreadnaught Mine.(7)
10.35 Settlement Agreement between the Company, Zuri Invest, A.G., Andre Michaels
and Peter Woodfield.(7)
10.36 Settlement Agreement between the Company, Werner Aeberhard, Chris Lambrianos,
Mikis Theodosiou, Andreas Samuel, as Executor of the Estate of Dinos N. Samuel,
Tania Bruntsfield, Jacques Philippou and the Royal Bank of Scotland, A.G.(7)
11.1 Computation of per share earnings.
16.1 Letter regarding change in certifying accountant.(6)
21.1 List of Subsidiaries of the Company.
23.1 Consent of Brown Armstrong Randall Reyes Paulden & McCown, CPA's.
(1) Incorporated by reference to the Company's Registration Statement on Form S-1,
File No. 33-39867, and pre-effective amendments thereto which was previously filed
with the Commission on April 8, 1991.
(2) Incorporated by reference to the Company's Registration Statement on Form S-8, File No.
33-38646, which was previously field with the Commission on January 23, 1991.
(3) Previously filed in connection with the Registration Statement on Form S-3, File
No. 33-45174, and combined Registration Statement on Form S-3, File No. 33-63374.
(4) Previously filed on Form 8-K on September 10, 1992.
(5) Previously filed on Form 8-K on June 15, 1994.
(6) Previously filed on Form 8-K on July 12, 1994.
(7) Previously filed on Form 10-KSB on September 28, 1995.
(8) Previously filed in connection with the Registration Statement on Form S-3, File
No. 333-286.
</TABLE>
(b) REPORTS ON FORM 8-K.
Listed below are reports on Form 8-K filed during the last quarter of the period
covered by this report: None.
-31-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BRUSH CREEK MINING AND DEVELOPMENT CO., INC.
(Registrant)
By: /s/ James S. Chapin
----------------------
James S. Chapin,
Chief Executive Officer
Dated: November 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, and
in the capacities and on the dates indicated:
Signature: /s/ James S. Chapin
----------------------
James S. Chapin
Chief Executive Officer
Chief Financial Officer,
Chairman of the Board and Director
(Principal Executive Officer and Principal Financial and
Accounting Officer)
Date: November 24, 1998
Signature:
Howard I. Kalodner
Director
Date: November 24, 1998
Signature: /s/ Albert Miller
-------------------
Albert Miller
Director
Date: November 24, 1998
Signature: /s/ Kenneth Friedman
----------------------
Kenneth Friedman
Director
Date: November 24, 1998
-32-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. - Financial Statements
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Balance Sheet as of June 30, 1998 . . . . . . . . . . . . . . . 36
Consolidated Statements of Operations for the Years Ended June 30, 1998
and 1997 and for the Period from July 1, 1989 (Date of Resumption of
Development Stage Enterprise Activities) Through June 30, 1998 . . . . . . 37
Consolidated Statements of Shareholders' Equity for the Years Ended June 30,
1998 and 1997 and for the Period from July 1, 1989 (Date of Resumption of
Development Stage Enterprise Activities) Through June 30, 1998 . . . . . . 39
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998
and 1997 and for the Period from July 1, 1989 (Date of Resumption of
Development Stage Enterprise Activities) Through June 30, 1998 . . . . . . 43
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 45
</TABLE>
-33-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Brush Creek Mining and Development Company, Inc.
Grass Valley, California
We have audited the accompanying consolidated balance sheet of Brush Creek
Mining and Development Company, Inc. and Subsidiary (a development stage
enterprise) as of June 30, 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the two years in
the period ended June 30, 1998, and for the period from the date of resumption
of development stage activities (July 1, 1989) through June 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Brush Creek Mining
and Development Company, Inc. and Subsidiary (a development stage enterprise) as
of June 30, 1998, and the results of its operations and its cash flows for each
of the two years in the period ended June 30, 1998, and the period from the date
of resumption of development stage activities (July 1, 1989) through June 30,
1998 in conformity with generally accepted accounting principles.
-34-
<PAGE>
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1,
there are conditions which raise substantial doubt about the Company's ability
to continue as a going concern, including the Company's ability to raise
additional capital to fund its operations and development programs and to
establish ore reserves. Management's plans in regard to these matters are
described in Note 1. Additionally, the Company is in default on the leases of
certain of its mining properties. The lessors have not taken action to foreclose
on the leases. The loss of these leases would have a material adverse effect on
the Company. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of reported asset
amounts and classification of liabilities that might result from the outcome of
these uncertainties.
BROWN ARMSTRONG RANDALL
REYES PAULDEN & McCOWN
ACCOUNTANCY CORPORATION
Bakersfield, California
November 22, 1998
-35-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 417,415
Advances. . . . . . . . . . . . . . . . . . . . . . . . 500
Inventory . . . . . . . . . . . . . . . . . . . . . . . 39,735
-------------
Total Current Assets. . . . . . . . . . . . . . . . . . . 457,650
Office Furniture and Equipment, Net . . . . . . . . . . . 42,074
Mineral Properties and Mining Equipment, Net. . . . . . . 4,657,421
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . 272,095
-------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . $ 5,429,240
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities. . . . . . . . $ 1,479,583
Current portion of long-term debt . . . . . . . . . . . 362,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . 3,700
-------------
Total Current Liabilities . . . . . . . . . . . . . . . . 1,845,283
-------------
Shareholders' Equity
Common stock, $0.0001 par value; authorized 100,000,000
shares; issued and outstanding, 5,504,179 shares . . . 53,643,325
Accumulated Deficit . . . . . . . . . . . . . . . . . . . (11,260,214)
Accumulated Deficit during the Development Stage. . . . . (38,799,154)
-------------
Total Shareholders' Equity. . . . . . . . . . . . . . . . 3,583,957
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . . . . . . $ 5,429,240
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-36-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND FOR
THE PERIOD FROM JULY 1, 1989 (DATE OF RESUMPTION OF DEVELOPMENT STAGE ENTERPRISE
ACTIVITIES)
THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
Development Stage
-----------------
Period from
July 1, 1989
Through
1998 1997 June 30, 1998
------------ ------------ ---------------
<S> <C> <C> <C>
Revenues
Sale of Joint Venture. . . . . . . . . . $ - $ - $ 4,232,000
Other Income . . . . . . . . . . . . . . 4,701 - 161,145
Interest . . . . . . . . . . . . . . . . 10,689 22,266 198,468
------------ ------------ ---------------
Total Revenues . . . . . . . . . . . . . . 15,390 22,266 4,591,613
------------ ------------ ---------------
Expenses
General and Administrative Expenses. . . 2,652,211 1,159,156 17,711,132
General Mining and Exploration . . . . . 2,487,019 2,140,228 13,541,272
Impairment of Development Costs. . . . . - 5,393,115 5,393,115
Loss on Lease Abandonments . . . . . . . - - 392,317
Depreciation and Amortization. . . . . . 252,791 370,642 1,686,693
(Gain) Loss on Sale of Mining Equipment. - 84,264 171,174
Interest Expense . . . . . . . . . . . . 6,200 116,626 498,494
Litigation Settlement. . . . . . . . . . 4,000 439,770 4,141,032
------------ ------------ ---------------
Total Expenses . . . . . . . . . . . . . . 5,402,221 9,703,801 43,535,226
------------ ------------ ---------------
Loss Before Extra-ordinary Item. . . . . . (5,386,831) (9,681,535) (38,943,613)
Extraordinary Item, Net Gain from Debt
Extinguishment, Net of Tax . . . . . . . - - 144,462
------------ ------------ ---------------
Net Loss . . . . . . . . . . . . . . . . . $(5,386,831) $(9,681,535) $ (38,799,151)
============ ============ ===============
Net Loss per Common Share. . . . . . . . . $ (.12) $ (.47)
============ ============
Weighted Average Common Shares Outstanding 4,660,433 2,136,576
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-37-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND FOR THE PERIOD
FROM JULY 1, 1989 (DATE OF RESUMPTION OF DEVELOPMENT STAGE ENTERPRISE
ACTIVITIES) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
Common Stock
-------------
Accumulated
Deficit
During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
--------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1989 . . 123,304 $12,318,877 $(11,260,214) $ - $1,058,663
Issuance of stock for
options on mining
properties. . . . . . . . 1,567 117,500 - - 117,500
Sales of stock in private
placement, net of
offering costs. . . . . . 15,000 434,000 - - 434,000
Issuance of stock for
services. . . . . . . . . 2,350 72,500 - - 72,500
Sale of stock in private
placement, net of
offering costs. . . . . . 13,173 828,110 - - 828,110
Issuance of units for debt
to affiliates . . . . . . 7,376 553,242 - - 553,242
Net loss . . . . . . . . . - - - (768,436) (768,436)
--------- ----------- ------------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-38-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND FOR THE PERIOD
FROM JULY 1, 1989 (DATE OF RESUMPTION OF DEVELOPMENT STAGE ENTERPRISE
ACTIVITIES) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
Common Stock
-------------
Accumulated
Deficit
During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
---------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1990. . . 162,770 14,324,229 (11,260,214) (768,436) 2,295,579
Issuance of stock for
options on mining
properties . . . . . . . . 15,474 2,283,020 - - 2,283,020
Sale of stock in private
placement, net of
offering costs . . . . . . 14,161 910,840 - - 910,840
Exercise of warrants. . . . 333 35,000 - - 35,000
Issuance of stock for
services . . . . . . . . . 6,412 1,097,258 - - 1,097,258
Issuance of stock for
debt . . . . . . . . . . . 515 114,560 - - 114,560
Cancellation of units
from CSGM. . . . . . . . . (7,377) - - - -
Issuance of shares to
CSGM . . . . . . . . . . . 12,000 - - - -
Issuance of stock for
litigation settlement, net 3,334 85,000 - - 875,000
Net loss. . . . . . . . . . - - - (2,558,381) (2,558,381)
---------- ---------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-39-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND FOR THE PERIOD
FROM JULY 1, 1989 (DATE OF RESUMPTION OF DEVELOPMENT STAGE ENTERPRISE
ACTIVITIES) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
Common Stock
-------------
Accumulated
Deficit
During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
--------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1991 . 207,622 19,639,907 (11,260,214) (3,326,817) 5,052,876
Issuance of stock for
options on mining
properties. . . . . . . 19,578 564,899 - - 564,899
Sale of stock in private
placement, net of
offering costs. . . . . 14,210 2,298,451 - - 2,298,451
Exercise of warrants
and options . . . . . . 12,483 1,250,750 - - 1,250,750
Issuance of stock
for services. . . . . . 18,458 1,818,102 - - 1,818,102
Issuance of stock
for debt. . . . . . . . 2,444 336,617 - - 336,617
Issuance of shares
to CSGM . . . . . . . . 8,800 748,750 - - 748,750
Capital contributions. . - 312,805 - - 312,805
Net loss . . . . . . . . - - - - (3,178,878)
--------- ---------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-40-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND FOR THE PERIOD
FROM JULY 1, 1989 (DATE OF RESUMPTION OF DEVELOPMENT STAGE ENTERPRISE
ACTIVITIES) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
Common Stock
-------------
Accumulated
Deficit
During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
--------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1992 . . 283,595 26,970,281 (11,260,214) (6,505,695) 9,204,372
Issuance of stock for
mining properties and
equipment . . . . . . . . 3,729 255,238 - - 255,238
Sale of stock. . . . . . . 1,066 80,000 - - 80,000
Exercise of warrants
and options . . . . . . . 9,540 707,105 - - 707,105
Exchange of options
for debt, CSGM. . . . . . 3,334 250,000 - - 250,000
Issuance of stock
for services. . . . . . . 18,319 1,616,659 - - 1,616,659
Issuance of stock for debt 10,514 713,494 - - 713,494
Issuance of shares
for CSGM. . . . . . . . . 10,026 500,285 - - 500,285
Issuance of stock for the
acquisition of Trans-
Russian . . . . . . . . . 53,940 (84,176) - - (84,176)
Net loss . . . . . . . . . - - - (3,420,220) (3,420,220)
--------- ----------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-41-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND FOR THE PERIOD
FROM JULY 1, 1989 (DATE OF RESUMPTION OF DEVELOPMENT STAGE ENTERPRISE
ACTIVITIES) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
Common Stock
-------------
Accumulated
Deficit
During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
--------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993 . . 394,063 31,008,886 (11,260,214) (9,925,915) 9,822,757
Sale of stock. . . . . . . 8,248 241,139
Exercise of warrants and - - 241,139
options. . . . . . . . . 5,832 608,925 - - 608,925
Issuance of stock for
services. . . . . . . . . 21,510 938,159 - - 938,159
Net income . . . . . . . . - - - 136,625 136,625
--------- ---------- ------------ ------------ -----------
Balance, June 30, 1994 . . 429,653 32,797,109 (11,260,214) (9,789,290) 11,747,605
Sale of stock. . . . . . . 256,667 3,696,457 - - 3,696,457
Net loss . . . . . . . . . - - - (4,671,396) (4,671,396)
--------- ---------- ------------ ------------ -----------
Balance, June 30, 1995 . . 686,320 36,493,566 (11,260,214) (14,460,686) 10,772,666
Sale of stock. . . . . . . 678,350 6,875,416 - - 6,875,416
Issuance of stock for
partial settlement of
Royal Bank agreement. . . 21,667 223,436 - - 223,436
Compensation recognized
on stock options granted. - 160,021 - - 160,021
Issuance of stock, held
in trust for partial
settlement of Zuri Invest
litigation. . . . . . . . 110,000 - - - -
Net loss . . . . . . . . . - - - - (9,270,102)
--------- ---------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-42-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND FOR THE PERIOD
FROM JULY 1, 1989 (DATE OF RESUMPTION OF DEVELOPMENT STAGE ENTERPRISE
ACTIVITIES) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
Common Stock
-------------
Accumulated
Deficit
During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
--------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996. . 1,496,337 43,752,439 (11,260,214) (23,730,788) 8,761,437
Sale of stock . . . . . . 1,638,711 2,111,101 - - 2,111,101
Issuance of stock
for New California
Placer mine. . . . . . . 2,000 5,200 - - 5,200
Zuri Invest Litigation
Settlement . . . . . . . - 1,200,000 - - 1,200,000
Compensation recognized
on stock options granted - 24,000 - - 24,000
Net loss. . . . . . . . . - - - (9,681,535) (9,681,535)
--------- ----------- ------------- ------------- ------------
Balance, June 30, 1997. . 3,137,048 47,092,740 (11,260,214) (33,412,323) 2,420,203
Sale of stock . . . . . . 2,367,131 3,697,585 - - 3,697,585
Issuance of common
stock subscribed . . . . - 2,673,600 - - 2,673,600
Zuri Invest Litigation
Settlement . . . . . . . - 179,400 - - 179,400
Net loss. . . . . . . . . - - - (5,386,831) (5,386,831)
--------- ----------- ------------- ------------- ------------
Balance, June 30, 1998. . 5,504,179 $53,643,325 $(11,260,214) $(38,799,154) $ 3,583,957
========= =========== ============= ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-43-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND FOR
THE PERIOD FROM JULY 1, 1989 (DATE OF RESUMPTION OF DEVELOPMENT
STAGE ENTERPRISE ACTIVITIES) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
Development Stage
-----------------
Period from
July 1, 1989
Through
1998 1997 June 30, 1998
------------ ------------ ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss . . . . . . . . . . . . . . . . . . . . . . $(5,386,831) $(9,681,535) $ (38,799,154)
------------ ------------ ---------------
Gain on debt restructuring . . . . . . . . . . . . . - - (144,462)
Impairment of development costs. . . . . . . . . . . - 5,393,115 5,393,115
Depreciation and amortization. . . . . . . . . . . . 252,791 370,642 1,686,693
Loss on lease abandonments . . . . . . . . . . . . . - - 444,359
Loss on litigation settlement. . . . . . . . . . . . 4,000 439,770 4,111,032
(Gain) loss on sale of mining equipment. . . . . . . - 84,264 49,164
Other. . . . . . . . . . . . . . . . . . . . . . . . - - 43,576
Shareholder payment of services. . . . . . . . . . . - - 105,055
Stock and debt for services. . . . . . . . . . . . . 176,584 - 879,652
Change in stock purchase price adjustment receivable - - -
Change in note receivable. . . . . . . . . . . . . . - 40,462 47,462
Change in inventory. . . . . . . . . . . . . . . . . (36,985) 21,540 (37,445)
Change in prepaid expenses . . . . . . . . . . . . . - 51,290 501,736
Change in deposits and other current assets. . . . . (500) - (116,461)
Change in deposits . . . . . . . . . . . . . . . . . - 105,052 (29,065)
Change in accounts payable and accrued liabilities . (291,431) 330,746 4,032,040
------------ ------------ ---------------
Total adjustments. . . . . . . . . . . . . . . . . . 104,459 6,836,881 16,966,451
------------ ------------ ---------------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . (5,282,372) (2,844,654) (21,832,703)
------------ ------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of mineral properties, equipment
and deferred developments . . . . . . . . . . . . . (90,388) (64,370) (5,164,817)
Acquisition of office equipment. . . . . . . . . . . (18,886) - (278,987)
Proceeds from sale of equipment. . . . . . . . . . . - 90,000 384,356
Proceeds from the acquisition of Trans-Russian . . . - - 20,060
------------ ------------ ---------------
NET CASH PROVIDED (USED) IN INVESTING
ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . (109,274) 25,630 (5,039,388)
------------ ------------ ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-44-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND FOR
THE PERIOD FROM JULY 1, 1989 (DATE OF RESUMPTION OF DEVELOPMENT
STAGE ENTERPRISE ACTIVITIES) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
Development Stage
-----------------
Period from
July 1, 1989
Through
1998 1997 June 30, 1998
----------- ------------ ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from affiliates. . . . . . . . . . . . . . . . - - 2,009,127
Payments made to affiliates . . . . . . . . . . . . . . - - (343,798)
Proceeds from issuance of stock . . . . . . . . . . . . 6,370,002 1,840,301 26,336,515
Proceeds from warrant extensions. . . . . . . . . . . . - - 207,750
Proceeds from issuance of notes payable . . . . . . . . - - 870,043
Payments on long-term debt. . . . . . . . . . . . . . . (672,000) (185,631) (2,093,979)
Proceeds from convertible debenture . . . . . . . . . . - - 300,000
Payments on convertible debenture . . . . . . . . . . . - - -
----------- ------------ ---------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . 5,698,002 1,654,670 27,285,658
----------- ------------ ---------------
Net Increase (Decrease) in Cash . . . . . . . . . . . . . 306,356 (1,164,354) 413,567
Cash at Beginning of Period . . . . . . . . . . . . . . . 111,059 1,275,413 3,848
----------- ------------ ---------------
Cash at End of Period . . . . . . . . . . . . . . . . . . $ 417,415 $ 111,059 $ 417,415
=========== ============ ===============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the year for interest (net of amounts
capitalized). . . . . . . . . . . . . . . . . . . . . . $ 6,200 $ 116,626 $ 343,802
=========== ============ ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES (See Note 15)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-45-
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION
----------------------------------------
Brush Creek Mining and Development Company, Inc. (the Company) was incorporated
in 1982 and operated as a mining and mineral development company until April 17,
1989, at which time its mining operations, all of which had been conducted
through the Brush Creek Joint Venture (BCJV) (40% owned) were terminated.
Shortly thereafter, the Company became actively engaged in acquiring additional
mineral properties, raising capital, and preparing properties for resumed
production. The Company did not have any significant operations or activities
from April 17, 1989 through June 30, 1989 and suspended all mining operations
and reduced its activities to a care and maintenance level. Accordingly, the
Company is deemed to have reentered the development stage effective July 1,
1989.
In February 1992, the Company began limited production at the Ruby Mine under a
permit that limited mill capacity to 225 tons per day. Production was
terminated due to adverse weather conditions in December 1992. The Company
resumed limited production at the Ruby Mine in July 1993 and gradually increased
production until October 1996 when production was suspended. In early 1997, the
Company began preparing the lower Brush Creek Mine for limited production. In
June 1997, the Company received interim approval from the United States Forest
Service to transport thirty tons of ore per day from the lower Brush Creek Mine
to the Ruby mill site. The Company has not commenced economic production and is
therefore still considered to be in the development stage.
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of the mineral
properties and other assets and the satisfaction of liabilities in the normal
course of business. The Company has incurred losses of $50,059,368 from
inception to June 30, 1998. The Company has not realized economic production
from its mineral properties as of June 30, 1998. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management continues to actively seek additional sources of capital to fund
current and future operations. There is no assurance that the Company will be
successful in continuing to raise additional capital, establishing probable or
proven ore reserves, or determining if the mineral properties can be mined
economically. Additionally, the Company is in default on the leases of certain
of its mining properties. The lessors have not taken action to foreclose on the
leases and the Company is making every effort to fulfill the agreements. The
loss of these leases would have a material adverse effect on the Company. These
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, B. Creek Acquisition Corporation and Alpha
Hardware. All material intercompany accounts and transactions have been
eliminated.
Use of Estimates
- ------------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, and
disclosure of contingent liabilities at the date of the financial statements,
and the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those results.
-46-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Mineral Properties and Mining Equipment
- -------------------------------------------
Mineral properties and mining equipment include land (and in prior years
development costs) and mining equipment carried at cost. Mining equipment
including mill facilities is depreciated using the straight-line method over
estimated useful lives of 5 to 15 years, or the units-of-production method based
on estimated tons of ore reserves if the equipment is located at a producing
property with a shorter economic life. Mining equipment not in service is not
depreciated.
In the past, the Company deferred direct costs related to the acquisition,
exploration and development of mineral properties pending determination of their
economic viability which normally entails performing an in-depth geological and
geophysical study. If no minable ore body was discovered, previously capitalized
costs were expensed in the period the property was abandoned. Any revenue
generated from pre-production activities was offset against the related deferred
development and pre-production costs. When a property was placed in commercial
production, such deferred costs were depleted using the units-of-production
method.
During 1997, the Securities and Exchange Commission (SEC) staff reconsidered
existing accounting practices for mineral expenditures by United States junior
mining companies. They now interpret generally accepted accounting policy for
junior mining companies to permit capitalization of acquisition, exploration and
development costs only after persuasive engineering evidence is obtained to
support recoverability of these costs (ideally upon determination of proven
and/or probable reserves based upon dense drilling samples and feasibility
studies by a recognized independent engineer). Although the Company has
performed drilling samples, and an independent engineer has deemed the gold
properties contain profitable reserves in excess of property and equipment costs
incurred through June 30, 1998, management has chosen to follow the more
conservative method of accounting by expending the previously capitalized gold
mineral costs, for which there is no feasibility study, for the year June 30,
1997.
Land Options
- -------------
In prior years it was the Company's policy to record land options at cost during
the initial year of the lease on the mining properties. As noted above, since
the Company interprets generally accepted accounting policies to permit
capitalization of acquisition costs including leases and land options only after
persuasive engineering evidence has been obtained to support recoverability of
these costs, these costs will now be expensed, effective July 1, 1996.
Asset Impairment
- -----------------
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," (SFAS 121), management of the Company reviews the net carrying
value of the Northern California mines and development properties on a regular
quarterly basis. Estimated future net cash flows from each mine are calculated
using estimated future prices, operating capital, and reclamation costs on an
undescended basis. Reductions in the carrying value of each mine are recorded to
the extent the net book value of the investment exceeds the estimate of future
discounted net cash flows.
The recoverability of the carrying value of development projects is evaluated
based upon persuasive engineering evidence of estimated future net cash flows
from each property, determined as described above, using estimates of contained
mineralization expected to be classified as proven and/or probable reserves upon
completion of a feasibility study. Reductions in the carrying value of each
property are recorded to the extent that the Company's carrying value in each
property exceeds management's estimate of future discounted net cash flows. When
mining equipment is idle, management decides if it will be used productively in
the future. For idle equipment that is unique to an abandoned or impaired
property, the Company reduces its carrying value following the impairment
accounting principle.
-47-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Asset Impairment (Continued)
- -----------------
Management's estimates of gold prices, recoverable proven and probable reserves,
operating capital, and reclamation costs are subject to certain risks and
uncertainties which may affect the recoverability of the Company's investment in
property, plant, and equipment. Although management has made its best estimate
of these factors based on current conditions, it is reasonably possible that
changes could occur in the near term which could adversely affect management's
estimate of the net cash flow expected to be generated from its operations.
Office Furniture and Equipment
- ---------------------------------
Office furniture and equipment are recorded at cost. Depreciation is computed by
the straight-line method based upon the estimated useful lives of the respective
assets, generally three to five years.
Income (Loss) per Common Stock
- ----------------------------------
Income (loss) per share of common stock is computed based on the weighted
average number of shares outstanding. Warrants, options and convertible
debentures have not been included in the calculation as their effect would be
anti-dilutive. All common shares included in the financial statements reflect a
reverse stock split of 10:1, which the Board of Directors approved and was
effective as of May 8, 1998.
Reclamation and Environmental Costs
- --------------------------------------
Reclamation costs and related accruals are based on the Company's interpretation
of environmental and regulatory requirements. Minimum standards for mine
reclamation have been established by various governmental agencies. Reclamation,
site restoration, and closure costs for each producing mine are accrued over the
life of the mine using the units-of-production method. Ongoing reclamation
activities are expensed in the period incurred.
Income Taxes
- -------------
The Company accounts for income taxes using the liability method which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Deferred tax assets and liabilities are determined based on the
difference between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Inventory
- ---------
Gold inventory is stated at net realizable value.
Stock Based Compensation
- --------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123), which is effective for periods beginning after
December 15, 1995. SFAS 123 requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value or provide proforma disclosure of the effect on
net income and earnings per share in the Notes to the Financial Statements. The
Company intends to continue to account for its stock-based compensation under
Accounting Principles Board No. 25; however, the Company has adopted the
disclosure provisions of SFAS 123 for the fiscal year ended June 30, 1998.
Cash and Cash Equivalents
- ----------------------------
For purposes of reporting cash flows, cash and cash equivalents include highly
liquid debt instruments purchased with a maturity of three months or less. Of
the $417,419 cash balance at June 30, 1998, $317,419was not covered by Federal
Depository Insurance.
-48-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Earnings Per Share
- --------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share", which was adopted by the Company for the year ended June 30, 1997. SFAS
128 replaces the presentation of primary earnings per share with a presentation
of basic earnings per share based upon the weighted average number of common
shares for the period.
Leases
- ------
The Company leases office space and mining properties under operating leases.
All of the Company's leased mining properties contain certain provisions which
provide the Company with the option to purchase the property at a predetermined
price or to renew the lease at a predetermined price. The Company is required to
pay all taxes, insurance, and maintenance on leased mining properties.
New Accounting Pronouncements
- -------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS 130), Reporting Comprehensive Income. This statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 will
be adopted by the Company for the year ended December 31, 1998. Prior period
financial statements provided for comparative purposes will be reclassified, as
required. Upon adoption, the Company does not expect SFAS 130 to have a
material effect upon the Company's financial condition or results of operations.
In June 1997, the FASB issued Statements of Financial Accounting Standards No.
131 (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. The statement requires the Company to report income/loss, revenue,
expense and assets by business segment including information regarding the
revenues derived from specific products and services and about the countries in
which the Company is operating. The Statement also requires that the Company
report descriptive information about the way that operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the Company's general-purpose financial statements, and changes in
the measurement of segment amounts from period to period. SFAS 131 has been
adopted by the Company for the year ended December 31, 1998. This statement has
no effect on financial statements traditionally presented by the Company, but
increases required disclosures.
NOTE 3 - AFFILIATES AND RELATED PARTIES
---------------------------------
Significant relationships with (1) companies affiliated through common ownership
and/or management, and (2) other related parties are as follows:
In prior years the Company entered into a number of relationships with
California Properties, Independent Sierra Gold Mines (ISGM) and Consolidated
Sierra Gold Mines (CSGM) at times when Ms. Simone Anderson was (i) an officer,
director and substantial shareholder of the Company, (ii) an officer and
director of California Properties and its wholly-owned subsidiary Sierra Gold
Properties, Inc., and (iii) the sole shareholder of ISGM and CSGM. The Company
has terminated its relationships with these entities, and the Company
understands that Ms. Anderson and her affiliates no longer hold 5% or more of
the Company's securities.
The former chief executive officer and director of the Company, Mr. James
Anderson, who is the spouse of the individual discussed in the previous
paragraph, is a director of California Properties and director and president of
ISGM and CSGM. Mr. James Anderson is also the chief executive officer of the
Moscow Country Club.
-49-
<PAGE>
NOTE 3 - AFFILIATES AND RELATED PARTIES (Continued)
---------------------------------
On October 18, 1993, the Company entered into a severance agreement with James
Anderson, the former chief executive officer and director of the Company. In
total satisfaction of all amounts owing Anderson, the Company issued 1,500,000
shares of its common stock to Anderson, 800,000 shares of which have already
been issued to Anderson. The remaining 700,000 shares are being held in an
escrow account until certain conditions are met. Included in these conditions
is the payment of approximately $80,000 owed to the Company by entities under
the direct or indirect control by Anderson. These amounts were not repaid. The
700,000 shares remain in escrow.
Mr. Georges Benarroch, who previously served as a director of the Company from
August 1990 to May 1991 and was an officer of the Company during a portion of
that period, has a controlling interest in Euro Canadian, a Canadian
corporation.
During the year ended June 30, 1995, the Company borrowed a total of $143,821
from two stockholders and two Directors. The loans were used to provide the
Company with working capital. The loans were secured by gold inventory and
equipment. The loans were repaid in full, including interest at 8.5% per annum.
NOTE 4 - STOCK PURCHASE PRICE ADJUSTMENTS
-----------------------------------
During the year ended June 30, 1996, the Company entered into investment
agreements in connection with offerings of its Common Stock in reliance on
Regulation S under the Securities and Exchange Act of 1933, as amended. Several
of these agreements contained purchase price adjustment clauses which require
that the initial purchase price be adjusted up or down depending on the average
share price of the Company's Common Stock during a stated period, typically 45
days, subsequent to the stock purchase closing date. The valuation period for
one particular transaction ended on September 27, 1996, however, the actual
adjustment was not resolved between the Company and the purchaser. As a result,
695,652 shares of common stock are currently being held in escrow, however, they
have not been included in shares outstanding at June 30, 1998. The Company
expects to resolve this purchase price adjustment within 180 days from June 30,
1998, and will reflect additional shares issued, if any, as shares outstanding
valued at its trading price on the date released to the purchaser.
In addition to purchase price adjustments, shares of Common Stock were issued at
various times during 1996 and 1997 pursuant to Regulation S of the Securities
and Exchange Act of 1933 and Regulation D of the Securities and Exchange Act of
1933 at discounts of up to 50% from the closing bid price on the day prior to
the sales.
NOTE 5 - OFFICE FURNITURE AND EQUIPMENT
---------------------------------
Office furniture and equipment consists of the following at June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Office furniture and equipment $ 84,356
Vehicles . . . . . . . . . . . 150,124
----------
234,480
Less accumulated depreciation. (192,406)
----------
$ 42,074
==========
</TABLE>
Depreciation expense at June 30, 1998, June 30, 1997 and for the period from
July 1, 1989 through June 30, 1998 was $22,358, $40,806 and $192,406,
respectively.
-50-
<PAGE>
NOTE 6 - MINERAL PROPERTIES AND MINING EQUIPMENT
-------------------------------------------
The Company's net investment in mineral properties and mining equipment as of
June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Development Mining
Land Costs Equipment Total
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Carson Mine . . . . . . . . . . . $2,199,858 $ - $ 42,835 $ 2,242,693
Brush Creek Mine. . . . . . . . . 408,496 - 403,171 811,667
Gardners' Point and Pioneer Mines 185,477 770,327 128,521 1,084,325
Ruby Mine . . . . . . . . . . . . - - 1,589,229 1,589,229
High Commission Mine. . . . . . . 101,875 - - 101,875
---------- ------------ ------------ ------------
2,895,706 770,327 2,163,756 5,829,789
Accumulated depreciation. . . . . - - (1,172,549) (1,172,549)
---------- ------------ ------------ ------------
$2,895,706 $ 770,327 $ 991,207 $ 4,657,240
========== ============ ============ ============
</TABLE>
All of the Company's mineral properties contain mines which were in production
previously. All such mines, except for the Gardners's Point and Pioneer Mines,
are located in the Allegheny-Forest-Downieville mining districts on the western
slope of the Sierra Nevada mountain range in Northern California and aggregate
approximately 6,300 acres. Because of the close proximity of the mines to each
other, the Company plans to centralize milling operations. The Gardner's Point
and Pioneer Mines are located outside this district and management has been
evaluating alternatives to placing them into current production. Current
developments and commitments related to certain properties follow:
Land Options
- -------------
The option to purchase the Ruby Mine began July 1, 1995 and terminates June 30,
2000, purchase price is $4,000,000. The option to purchase the Kate-Hardy Mine
began in 1992 and terminates September 18, 1998, purchase price $1,500,000. The
option to purchase the Rising Sun Mine began July 1, 1990 and terminates June
30, 2000, purchase price is $1,000,000.
Ruby Mine
- ----------
During 1992, the Company entered into an option agreement to lease this
property in exchange for a total of 225,000 shares of the Company's common stock
with a value of $112,500. In 1990, the Company entered into a lease purchase
agreement, for this property. This lease was modified on March 27, 1997.
Pursuant to the terms of this lease, the Company must pay a 7-1/2% net smelter
royalty on all minerals produced from lode deposits and 10% on minerals produced
from placer deposits with a minimum lease payment of $13,066 per month through
June 30, 2000, subject to an adjustment based on the Consumer Price Index. The
lease may be extended for two additional five-year periods or the property may
be purchased for $4,000,000 subject to adjustment based on the Consumer Price
Index payable by June 30, 2000. All payments made subsequent to July 1, 1995, to
acquire the lease/option and all payments made under the lease subsequent to
July 1, 1995, will be credited against the option purchase price. Performance
under the lease purchase agreement is secured by the Company's equipment used in
the mining operations on these leased premises. The net book value of this
equipment was approximately $991,207 at June 30, 1998.
-51-
<PAGE>
NOTE 6 - MINERAL PROPERTIES AND MINING EQUIPMENT (Continued)
-------------------------------------------
The Rising Sun Mine
- ----------------------
In December of 1989, the Company issued 10,000 shares of its common stock for an
option to lease the Rising Sun Mine. On June 30, 1990, the Company exercised
the option upon payment of $20,000 cash and entered into a five year lease with
an option to purchase. Pursuant to the terms of the lease, which were modified
on November 11, 1994, the Company must pay a net smelter royalty of 8% on all
minerals produced with a minimum royalty of $4,590 per month, through June 30,
2000, subject to an adjustment based on the Consumer Price Index. The property
may be purchased for $1,000,000 payable on or before June 30, 2000, subject to
adjustment based on the Consumer Price Index. All payments made to acquire the
lease/option and all payments made under the lease will be credited against the
option purchase price.
Ruby Mine and Rising Sun Mine - 1997 Modification Agreement
- --------------------------------------------------------------------
During 1997, the Company negotiated modification agreements for the Ruby Mine
and the Rising Sun Mine to pay, in cash, one month lease payment in arrears,
increase the amount of equipment held as collateral pursuant to the Ruby Mine
and the Rising Sun Mine lease agreements by filing UCC-1 financing statements
listing the additional equipment (as noted above, this equipment is located on
the Ruby Mine property and secures the performance of the Ruby Mine lease), all
right, title and interest of certain "ore specimens" for which Ruby Development
Co., Inc. will credit the value against past due minimum royalty payments and
grant Ruby Development Co., Inc. an option to purchase up to 50,000 shares of
the Company's common stock at a price of $.25 per share until July 1, 1999.
At June 30, 1998, the Company owed approximately $720,000 on the Ruby Mine lease
and approximately $25,000 on the Rising Sun lease which constitutes default on
the agreements. The outstanding balances are included in accounts payable at
June 30, 1998.
A valuation allowance to reduce the carrying balance of capitalized land/land
options and development costs associated with these leases was not recorded in
the past. As stated in Note 1, the Company has expensed all land options and
treated this as a cumulative effect of change in accounting principle. The
Company's general default of the agreements places the Company at risk of losing
its rights to mine at these locations. The valuation allowance required, should
the lessor take action to assert its right under the lease agreements, would
approximate $4,205,854 for the Ruby Mine and $139,091 for the Rising Sun Mine.
Merger with Sierra Gold Properties, Inc. - Kate-Hardy Mine
- ------------------------------------------------------------------
In January 1992, the shareholders of California Properties approved a merger
between its wholly owned subsidiary, Sierra Gold and B. Creek Acquisition
Corporation, a wholly owned subsidiary of the Company. The merger was recorded
effective March 31, 1992. The Company issued 2,330,020 shares of common stock
with a value of $74,807 and gave up certain assets and assumed certain
liabilities totaling $175,193 in exchange for all of the common stock of Sierra
Gold. Management determined the value of Sierra Gold's assets to be
approximately $250,000 at the time the letter of intent was entered into and
announced in April 1989. Proforma results of operations for the interim periods
presented are not shown as Sierra Gold conducted no significant activities
during these periods.
The primary asset of Sierra Gold, a lease with an option to acquire the
Kate-Hardy Mine, expired on April 24, 1992, and as a result, during the
nine-months ended March 31, 1992, the Company recognized a loss on the
expiration of the lease of $250,000. On June 30, 1992, the Company entered into
a new lease, effective March 23, 1992, in the form of a mining option agreement
for a term of five years expiring March 22, 1997. During the term of the
option, the Company must pay a $50,000 payment (initial option payment) upon the
execution of the agreement; $5,500 per month for each month during the first
year; $6,500 per month during the second year; $7,500 per month during the third
year; $8,500 per month during the fourth year; and $9,500 per month during the
fifth year. In addition, the Company must pay a 6% net smelter royalty on all
minerals produced. The option purchase price for the mine is $1,500,000 less
75% of all option payments paid up to a maximum of $750,000.
-52-
<PAGE>
NOTE 6 - MINERAL PROPERTIES AND MINING EQUIPMENT (Continued)
-------------------------------------------
Merger with Sierra Gold Properties, Inc. - Kate-Hardy Mine (Continued)
- ------------------------------------------------------------------
During 1997, the Company paid $10,000 to the Kate-Hardy Mine lessor to extend
the lease agreement for an additional three month period. The extension expired
on June 27, 1997. Subsequent to this expiration, the Company negotiated a
modification to the original agreement. Under this modification, the Company was
to pay $10,500 a month in lease payments and had the option to purchase this
property for $1,500,000. This option expires on September 18, 1998.
At June 30, 1998, the Company owed approximately $140,000 to the Kate-Hardy Mine
lessor. The outstanding balance is included in accounts payable at June 30,
1998.
In prior years, a valuation allowance to reduce the carrying balance of
capitalized land/land options and development costs associated with the
Kate-Hardy Mine lease was not recorded in the past. As stated in Note 1, the
Company has expensed all land options and treated this as a cumulative effect of
change in accounting principle. The Company's general default of the expired
agreement and the lack of a current agreement places the Company at risk of
losing its rights to mine at this location. The valuation allowance required,
should the lessor take action to assert its right under the lease agreement,
would approximate $156,456.
New California Placer Mine - Sierra County, California
- -------------------------------------------------------------
In February 1997, the Company entered into an exploration license and option to
purchase the New California Mine for 20,000 shares of the Company's restricted
stock and $10,000 payable annually for up to a three year period. The purchase
price is $250,000 should the Company decide to exercise that option under the
agreement.
The New California Mine is an unpatented placer mine containing approximately
800 acres of land and is located between Poker Flat and Gardners Point. The
unpatented claims are in good standing. Subsequent to June 30, 1998, the Company
transferred this property back to the lessor.
Wilbank's Placer and Loade Mine - Poker Flat Mining District
- ---------------------------------------------------------------------
In March 1997, the Company entered into an exploration license and option to
purchase the Wilbank's claims for a $10,000 cash payment and $1,000 per month
during the option period. The purchase price is $200,000 should the Company
exercise that option. The Company has, under the terms of the agreement, an
additional five year term to purchase the property for $300,000 payable at
$2,000 per month. Subsequent to June 30, 1998, the Company transferred this
property back to the lessor.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
--------------------------------------------
Accounts payable and accrued liabilities consist of the following at June 30,
1998:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable. . . . . $1,299,836
Related party payables. . 7,826
Accrued payroll and other 172,191
----------
$1,479,853
==========
</TABLE>
No unused lines of credit exist.
-53-
<PAGE>
NOTE 8 - INCOME TAXES
-------------
At June 30, 1998, the Company had available net operating loss carryforwards for
financial statement and federal income tax purposes of approximately
$25,000,000. These loss carryforwards expire between 1999 and 2010.
The Company has reported income tax losses of approximately $35,000 in prior
years. In general, income tax losses are carried forward to future years to
reduce future income taxes.
In the case of a loss corporation which changes more than 50% of its ownership,
Internal Revenue Code Section 382 limits the amount carried forward to a small
percentage of the fair market value of the corporation's stock immediately
before the ownership change. The Company's 1989 ownership change reduced the
amount of the pre-change loss carryforward from approximately $6,000,000 to
approximately $70,000.
A valuation allowance of approximately $8,500,000 has been provided to offset
the benefit of approximately $8,500,000 from the remaining $25,000,000 loss
carryforwards. This valuation allowance is necessary because at June 30, 1998,
the available benefits are more likely than not to expire before they can be
used.
NOTE 9 - SHAREHOLDERS' EQUITY
---------------------
During fiscal 1998, the following major equity transactions occurred:
-54-
<PAGE>
The Company effected a 10 for 1 reverse stock split. To effect the split, the
Company's authorized, issued, and outstanding no par stock was reduced from
53,705,482 to 5,504,179.
At year end, the Company shareholders' equity had increased 2,673,600 and is
carried as subscribed common stock.
The Company sold 1,867,131 shares of Common Stock for $2,224,599. These shares
were sold pursuant to Regulation S of the Securities Act of 1933.
The Company issued 500,000 shares of Common Stock with a value of $3,250,001.
The shares were registered with the Securities and Exchange Commission on Form
S-8.
The following shares were sold under Regulation D and Section 4(2) of the
Securities Act of 1933. Investors who acquires such shares were required to be
accredited investors. The Company has agreed to register the shares pursuant to
a registration statement to be filed with the Securities and Exchange
Commission. The Company sold 600,000 restricted shares of Common Stock at $.125
per share wherein the Company received net proceeds of $75,000; 1,822,221
restricted shares of Common Stock at $.15 per share wherein the Company received
net proceeds of $290,000; 4,300,000 restricted shares of Common Stock at $.07
per share wherein the Company received net proceeds of $301,000; 6,600,000
restricted shares of Common Stock at $.10 per share wherein the Company received
net proceeds of $660,000; 670,000 restricted shares of Common Stock at $.50 per
share wherein the Company received net proceeds of $335,000; 1,750,00 restricted
shares of Common Stock at $.184 per share wherein the Company received net
proceeds of $322,000; 60,000 restricted shares of Common Stock at $.50 per share
wherein the Company received net proceeds of $30,000; 1,150,000 restricted
shares of Common Stock at $.184 per share wherein the Company received net
proceeds of $211,600. The Company sold 5,000,001 shares of Common Stock under
Regulation S at $.65 per share wherein the Company received net proceeds of
$3,250,000.
During fiscal 1997, the following major equity transactions occurred:
The Company sold 286,756 shares of Common Stock for $1,016,250. These shares
were sold pursuant to Regulation S of the Securities Act of 1933.
The Company issued 2,000 shares of Common Stock with a value of $5,200 in
connection with its acquisition of the New California Placer Mine.
-55-
<PAGE>
NOTE 9 - SHAREHOLDERS' EQUITY (Continued)
---------------------
The Company issued 16,500 shares of Common Stock with a value of $41,250. The
shares were registered with the Securities and Exchange Commission on Form S-8.
Shareholders' equity increased by $1,200,000 as shares issued in the prior year
were used to settle the Zuri Invest litigation. See 100,000 shares below issued
in 1996.
The Company sold 360,001 restricted shares of Common Stock at $.0625 per share
wherein the Company received net proceeds of $225,000; 660,000 restricted shares
of Common Stock at $.07 per share wherein the Company received net proceeds of
$460,600; 175,455 restricted shares of Common Stock at $.11 per share wherein
the Company received net proceeds of $193,000; 140,000 restricted shares of
Common Stock at $.125 per share wherein the Company received net proceeds of
$175,000. All shares were sold under Regulation D and Section 4(2) of the
Securities Act of 1933. Investors who acquired such shares were required to be
accredited investors. The Company has agreed to register the shares pursuant to
a registration statement to be filed with the Securities and Exchange
Commission.
During fiscal 1996, the following major equity transactions occurred:
The Company sold 678,350 shares of Common Stock for $6,875,416. These shares
were sold pursuant to Regulation S of the Securities Act of 1933.
The Company issued 110,000 shares as partial settlement of the Zuri Invest
litigation. These shares were held in trust by the adverse party. The stock was
forfeited and was valued at fair market value on the forfeit date, i.e. the
trading price.
The Company issued 21,667 shares as partial settlement of the Royal Bank of
Scotland litigation.
During fiscal 1995, the following major equity transactions occurred:
The Company sold 256,667 shares of Common Stock for $3,696,457. These shares
were sold pursuant to Regulation S of the Securities Act of 1933.
During fiscal 1994, the following major equity transactions occurred:
The Company issued 21,510 shares of Common Stock in exchange for certain legal,
engineering, consulting, and employment services rendered to the Company
totaling $938,159.(*)
The Company issued shares of the Company's Common Stock pursuant to a service
agreement with James Anderson totaling $421,875.
The Board of Directors of the Company approved a 15-for-1 reserve stock split
effective November 29, 1993.
During fiscal 1993, the following major equity transactions occurred:
The Company issued 53,940 shares of Common Stock in connection with its
acquisition of Trans-Russian. Total reduction in equity in relation to the
acquisition was $84,176.(*)
In connection with its mining properties, the Company issued 3,729 shares of
Common Stock for accrued lease payments of $107,710, prepayment of certain lease
expenses of $113,153, and acquisition of mining equipment of $34,375.(*)
The Company issued 10,514 shares of Common Stock with a value of $713,494 in
satisfaction of outstanding debt obligations amounting to $558,592.(*)
-56-
<PAGE>
NOTE 9 - SHAREHOLDERS' EQUITY - (Continued)
---------------------
The Company issued 10,026 shares of Common Stock with a value of $500,285 in
satisfaction of the Company's obligation to CSGM of $574,750.(*)
The Company issued 18,319 shares of Common Stock in exchange for certain legal,
engineering, consulting, and employment services rendered to the Company
totaling $1,616,659.(*)
The Company sold 1,066 shares of stock at $7.50 per share, totaling $80,000.
The Company issued 3,334 shares of Common Stock pursuant to the exercise of
options in settlement of debt to CSGM of $250,000.(*)
During fiscal 1992, the following major equity transactions occurred:
The Company issued 15,534 shares of Common Stock in connection with its
acquisition of Sierra Gold and the related options on mineral properties for
$74,807.(*)
The Company issued 1,031 shares of Common Stock in connection with its
acquisition of the Kate-hardy Mine for $88,667 and prepayment of certain lease
expenses of $66,000.(*)
In connection with its lease on the Ruby Mine, the Company issued 2,480 shares
of Common Stock for: accrued lease payments of $72,502, prepayment of lease
obligation of $63,287, and modification and extension to lease term of
$154,836.(*)
In connection with its lease on the Rising Sun Mine, the Company issued 533
shares of Common Stock for accrued lease payments of $22,002, prepayment of
lease obligation of $18,687, and modification and extension to lease term of
$4,111.(*)
The Company issued 2,444 shares of Common Stock in satisfaction of outstanding
debt obligations amounting to $336,617.(*)
The Company issued 88000 shares of Common Stock with a value of $748,750 to
CSGM in satisfaction of the Company's obligation to CSGM of $900,000.(*)
The Company issued 11,791 shares of Common Stock in exchange for certain legal,
engineering, and employment services rendered to the Company totaling
$1,286,852.(*)
In May 1992, the Company entered into a three-year consulting contract with Mr.
Anderson in exchange for issuing 6,667 shares of Common Stock with a value of
$531,250.(*)
Ms. Anderson paid expenses on behalf of the Company amounting to $105,055. This
amount and the proceeds received from the extension of warrants of $207,750
totaling $312,805 is accounted for as a contribution of capital.
The Company made several private placements of a total of 14,210 shares of its
Common Stock at prices ranging from $.90 to $1.50 per share totaling $2,298,451,
net of offering costs of $177,974.
During fiscal 1991, the following major equity transactions occurred:
On June 29, 1990, the Company sold 13,173 units for $987,955. Each unit
consisted of one share of Common Stock and a warrant to purchase one share of
Common Stock. The Company's previous chairman, Mr. Benarroch, is the president
of the underwriter, Euro Canadian, in this transaction, which received a
commission of $98,796. The underwriter also received warrants to purchase 3,334
shares of the Company's Common Stock at $.50 through July 1992. In July 1990,
the Company sold an additional 14,161 units. The Company received $910,840 after
offering expenses. Warrants covering 25,333 shares are exercisable at $.70
through June 1992, and warrants covering 2,000 shares are exercisable at $.90
through June 1992.
-57-
<PAGE>
NOTE 9 - SHAREHOLDERS' EQUITY - (Continued)
---------------------
On June 26, 1990, the Company's Board of Directors approved the issuance of
7,376 units to ISGM and CSGM in satisfaction of the Company's debt of $553,242
to these entities. Each unit consists of one share of the Company's Common Stock
and one warrant to purchase one share of stock at $.50 per share, exercisable
through July 1992. As of December 31, 1990, these units had not been delivered
due to administrative delays. As an inducement to the approval of the consulting
agreement described below, CSGM and ISGM agreed to cancel the units approved by
the Board of Directors on June 26, 1990.
On January 23, 1991, the Company entered into an agreement with CSGM and ISGM
whereby CSGM and ISGM are obligated to render consulting services to the Company
to assist the Company in the acquisition of mining properties, identification of
and negotiation with the Company's creditors, and other day-to-day business and
administrative tasks. In exchange for rendering consulting services, the Company
agreed to issue 12,000 shares of its Common Stock to CSGM. As the market value
of the shares issued was approximately equal to that of the units canceled, the
issuance of the shares has been treated as a replacement of the units for
accounting purposes.(*)
In January 1991, an additional 4,927 shares of Common Stock were issued to
third parties. These shares, valued at fair market value of $630,568, were
issued for legal and consulting services rendered and the repayment of a note
payable issued for services of $114,560.(*)
The Company agreed to issue 2,000 shares of Common Stock valued at fair market
value of $581,250 to an engineering firm for past and future services.(*)
The Company entered into a litigation settlement with Mr. Benarroch, whereby
6,667 shares of the Company's outstanding Common Stock were returned to the
Company and, simultaneously, the Company issued back to Mr. Benarroch 10,000
shares, valued at fair market value of $1.75 per share. The settlement resulted
in a net issuance of 3,333 shares of Common Stock valued at $875,000.(*)
During fiscal 1990, the Company initiated a private placement of its Common
Stock. In April 1990, the Company sold 15,000 shares for $450,000.
In March 1990, Ms. Anderson sold 6,667 shares of her Common Stock to Sungold
Mining Corp. (Sungold) for $10,000 as an inducement for an affiliate of Sungold
to lend the Company $140,000.(*)
In March and May 1990, the Company issued 23,500 shares of Common Stock in
exchange for legal services valued at $72,500.(*)
(*) For each issuance involving noncash consideration, the Company recorded
the fair market value of the shares issued as the consideration received.
-58-
<PAGE>
NOTE 10 - STOCK OPTIONS AND WARRANTS
-----------------------------
The Company has an incentive stock option plan under which five and ten-year
options may be granted to key employees to purchase up to 3,333 shares of the
Company's Common Stock at the market price on the date of grant. At June 30,
1998, no options had been granted under this plan. A total of 33,333 shares of
the Company's unissued Common Stock has been reserved for this plan.
The Company has a nonqualified stock option plan, under which options to
purchase a total of 1,186,000 shares from $.23 to $4.13 were outstanding and
exercisable at June 30, 1998.
The Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plan. The Company also applies principles from the consensus
reached in EITF 87-33 on stock option re-pricing transactions. The Company did
cancel certain stock options and grant new stock options during the prior fiscal
year but these transactions were not considered to be stock option re-pricing
transactions as defined by EITF 87-33. The consensus reached by EITF 87-33
applies to the cancellation of an existing original option and the granting of a
new option that contains terms identical to the remaining terms of the original
option except that the exercise price is reduced. The terms of the new options
granted by the Company were not identical to the remaining terms of the original
options. Accordingly, compensation cost has been recognized for the difference
between the market value of the stock at the date of issuance and the exercise
price of the new stock options granted. Had compensation cost for the Company's
stock-based compensation plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the provision of SFAS 123,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C> <C>
Net Loss. . . . . . . . . As reported $(5,386,831) $ (9,681,535)
Pro forma $(5,386,831) $(10,609,426)
Net loss per common share As reported $ (.12) $ (.47)
Pro forma $ (.12) $ (.51)
</TABLE>
The fair value of the option grant was estimated on the date of granting using
the Black-Scholes American option-pricing model with the following assumptions:
risk-free interest rate of 7.5 percent, dividend yield rate of zero, expected
life of 5.0 years, and volatility of 83.6 percent.
-59-
<PAGE>
NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)
-----------------------------
A summary of the status of the Company's stock option plan as of June 30, 1998
and 1997, and changes during the years ending on those dates is presented below
as effected by 1:10 stock split:
1998
- ----
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
-------- ---------
<S> <C> <C>
Fixed Options
Outstanding at beginning of year
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . 186,000
Expired. . . . . . . . . . . . . . . . . . . . . . . . . . (10,000) $ 20.00
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . -
--------
Outstanding at end of year . . . . . . . . . . . . . . . . . 176,000
========
Options exercisable at year end. . . . . . . . . . . . . . . . 176,000
========
Weighted-average fair value of options granted during the year N/A
========
</TABLE>
1997
- ----
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
--------- --------
<S> <C> <C>
Fixed Options
Outstanding at beginning of year . . . . . . . . . . . . . . 105,100
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . 101,000 2.30
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . (87,500) 20.27
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . -
---------
Outstanding at end of year . . . . . . . . . . . . . . . . . 186,000
=========
Options exercisable at year end. . . . . . . . . . . . . . . . 186,000
=========
Weighted-average fair value of options granted during the year $ 1.80
=========
</TABLE>
-60-
<PAGE>
NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)
-----------------------------
The following table summarizes information about fixed stock options outstanding
at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding at Contractual Average Outstanding at Average
Exercise Prices June 30, 1998 Life (Years) Exercise Price June 30, 1998 Exercise Price
- --------------- -------------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
2.00-26.30. . . 9,400 .63 - 9,400 -
8.50-41.30. . . 7,200 2.29 20.00 7,200 20.00
2.30. . . . . . 9,600 3.74 2.30 9,600 2.30
2.50. . . . . . 5,000 1.00 2.50 5,000 2.50
</TABLE>
NOTE 11 - RESTATEMENT OF PRIOR YEAR
----------------------------
Change for New Pronouncement
- -------------------------------
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Accumulated deficit through the development stage July 1, 1997
As previously reported . . . . . . . . . . . . . . . . . . . $ 7,813,318
Adjustment for impairment of development costs under FAS 121 . (5,393,115)
------------
Balance at July 1, 1997. . . . . . . . . . . . . . . . . . . . $ 2,420,203
============
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
-------------------------------
Lease expense consists principally of an operating lease for the Company's
office building which calls for monthly payments of $2,500 from June 1989
through May 1994. The rent is subject to annual adjustment based upon the
Consumer Price Index. Rent expense for the years ended June 30, 1998 and 1997
was approximately $30,000.
See Note 6 regarding mineral property commitments.
The Company's mining and exploration activities are subject to various federal
and state laws and regulations governing the protection of the environment.
These laws and regulations are continually changing and are generally becoming
more restrictive. The Company conducts its operations so as to protect the
public health and environment and believes its operations are in compliance with
all applicable laws and regulations. The Company has made, and expects to make
in the future, expenditures to comply with such laws and regulations. The
Company cannot predict such future expenditures.
-61-
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
-------------------------------
The Company contracted with an outside consultant to develop a cost estimate for
future reclamation costs on the Gardner's Point Mine. This estimate was
developed pursuant to SMARA guidelines and required for submission to the lead
agency and the Department of Conservation as the Company develops a plan for
future mining at this site. Future reclamation costs are estimated to be
$380,000. Additional bonding for reclamation will be required subsequent to
final approval estimated to be completed in May of 1998. At June 30, 1998, a
contingent liability for the amount of the new estimate which exceeds the
liability accrued in prior years was not included in the Company's financial
statements. Consistent with the Company's policy, as discussed in Note 1,
reclamation costs are accrued over the life of the mine using the
units-of-production method. Once the mine enters the production stage, should
the end of the mine's production life become imminent, the entire estimated
liability would be expensed.
On April 1, 1997, the Company sold certain pieces of equipment with a net book
value of $73,191 for $60,000 pursuant to a sale-leaseback agreement. The
agreement required a single $90,000 payment on July 31, 1997 to reacquire title
to the equipment. The Company did not make the $90,000 payment and defaulted on
the agreement. Subsequent to the default, the Company made a $10,000 payment to
continue to use the equipment. No additional agreements or modifications to the
original agreement have been made. Due to the Company's default, the assets are
not included on the books of the Company.
NOTE 13 - LEGAL PROCEEDINGS
------------------
During fiscal 1996, the Company entered into two significant settlement
agreements involving claims made by Zuri Invest A.G., et al. and the Royal Bank
of Scotland, et al. which in effect resolved all material litigation against the
Company. The terms of the settlement with the Royal Bank were amended in fiscal
1997.
THE ZURI INVEST ACTION.
During the fiscal year ended June 30, 1998, the Company completed its
obligations to the Zuri Plaintiffs (as defined below) under a settlement
agreement entered into on December 14, 1995 (the "Zuri Agreement") with Zuri
Invest A.G., Andre Michaels and Peter Woodfield (the "Zuri Plaintiffs"), in
connection with an action which had been commenced in December 1991 (the "Zuri
Invest action"), to partially satisfy the joint and several judgment
entered in the Zuri Invest action against the Company and Simone Anderson
and James Anderson (collectively, the "Andersons") on October 31, 1995 (the
"Judgment"). The Zuri Plaintiffs agreed, subject to the receipt of the
consideration described below, not to seek any further recovery directly from
the Company on the Judgment, and to release the Company from any further
liability thereunder. The Zuri Plaintiffs also agreed not to pursue recovery
against the Andersons on the Judgment if it is judicially determined that the
Andersons have indemnification rights against the Company with respect to the
Judgment. The Company issued and delivered to each of Woodfield and Michaels
250,000 shares of the Company's Common Stock. The Company issued 600,000 shares
of the Company's Common Stock to Zuri Invest and delivered 200,000 of such
shares to Zuri Invest on or about April 10, 1996, 200,000 shares on or about
June 11, 1996, and the remaining 200,000 shares on or about September 9, 1996.
As security for the Company's obligations to issue and deliver the above
described shares of Common Stock, the Company issued a promissory note in the
amount of $1.2 million payable to the Zuri Plaintiffs. The note was secured by
a deed of trust on all real property and patented and unpatented mining
claims owned by the Company. Pursuant to the Zuri Agreement, the principal
amount of the note shall be reduced as the shares issued to the Zuri Plaintiffs
are sold, dollar for dollar by the gross proceeds generated from such sales
until such time as sales collectively total in gross $1.2 million at which time
the note shall be deemed paid. Notwithstanding the foregoing, the note shall
also be deemed paid after the passage of 180 days after the last distribution of
shares which, as stated above, was distributed in September 1996. As a result
thereof, such note has been deemed paid by the Company.
Pursuant to the Zuri Agreement, the Company also assigned to the Zuri
Plaintiffs an interest (33% of the Company's 60% interest) in claims asserted
against the Andersons and their controlled corporations in the action entitled
Brush Creek Mining and Development v. F. James Anderson, et al., currently
pending in the United States District Court, Northern District of California.
-62-
<PAGE>
NOTE 13 - LEGAL PROCEEDINGS (Continued)
------------------
THE ROYAL BANK ACTION.
On December 13, 1995, the Company entered into an agreement (the "Royal Bank
Agreement") to settle an action commenced by the Royal Bank of Scotland, et
al. by delivering to the plaintiffs in such suit (the "Royal Bank Plaintiffs")
216,667 shares of the Company's Common Stock and cash in the amount of
$241,000. The Company also assigned to the Royal Bank Plaintiffs a portion of
its interest in any total recovery from claims against the law firm formerly
known as Bartel, Eng, Miller & Torngren, the Company's formal legal counsel
("Bartel, Eng"). On December 13, 1996, the Company was further required to
deliver to each of the Royal Bank Plaintiffs, at his or her option, additional
shares of the Company's common stock or additional cash. The number of shares
of Common Stock or the amount of cash each Royal Bank Plaintiff would be
entitled to receive is based on the amount of his or her pro rata interest in
amounts paid by the Company pursuant to the Royal Bank Agreement. If all Royal
Bank Plaintiffs would elect to receive Common Stock, the Company would be
required to issue and deliver a maximum of 300,000 shares in the aggregate and
if all Royal Bank Plaintiffs elect to receive cash, the Company would be
required to deliver cash in the maximum aggregate amount of $600,000.
Prior to December 13, 1996, the Royal Bank Plaintiffs elected to receive
$600,000 in cash pursuant to the term of the Royal Bank Agreement. On or about
December 17, 1996, the Company received notice from the Royal Bank Plaintiffs
that the Company was in default of its obligation to pay them $600,000 on
December 13, 1996. Under the Royal Bank Agreement, such default caused the
Company to incur an immediate $3.25 million debt to the Royal Bank Plaintiffs.
Subsequently, in January 1997, the Company entered into a Forbearance Agreement
(the "Forbearance Agreement") with the Royal Bank Plaintiffs which provided that
notwithstanding the $3.25 million obligation, the Royal Bank Plaintiffs will
forbear from exercising their rights and remedies against the Company provided
the Company makes a payment of $629,100 on or before March 20, 1997 and a
payment of $175,000 on or before July 1, 1997. The Company has the option to
postpone the second payment ($175,000) by delivering written notice to the Royal
Bank Plaintiffs no later than June 25, 1997 whereupon the second payment shall
be paid no later than December 15, 1997 and the amount shall be increased to
$250,000. The Company also agreed to reimburse the Royal Bank Plaintiffs for
their attorney fees and costs. Thereafter, the Royal Bank Plaintiffs agreed to
extend the time period for paying the $629,100 to them until May 15, 1997. In
addition, the second payment was increased to $225,000 to be payable July 1,
1997 provided it may be postponed until December 15, 1997 in which event the
amount shall be increased to $300,000. The amount which was due May 15, 1997 was
not paid by such date. However, as of June 2, 1997, the Company entered into an
Amendment No. 2 to the Forbearance Agreement ("Amendment No. 2") which, among
other things, provided that the Royal Bank Plaintiffs shall continue to forbear
from exercising its rights and remedies under the Royal Bank Agreement and
related Forbearance Agreement, provided the Company performs the following: (a)
pay $896,000 in eight installments of $112,000 each on May 31, July 31,
September 30 and November 30, 1997 and January 31, March 31, May 31 and July 31,
1998 (the "Periodic Payments"), (b) pay $250,000 on or before September 30,
1998, (c) makes payments of $25,000 within five business days after any
closing(s) since March 20, 1997, of any single or series of sale-leaseback
transaction(s) which the Company shall have received in the aggregate of at
least $65,000 in proceeds, and (d) makes a final payment on or before September
30, 1998 of the Judgment Amount (as defined in the Forbearance Agreement) less
the aggregate amount of the Periodic Payments previously paid, provided,
however, that if the Company has timely performed its obligations under its
settlement documents with the Plaintiffs and either (i) Plaintiffs have received
all of the Periodic Payments, or (ii) the Company makes one final payment in an
amount set forth in Amendment No. 2 which amount ranges from $950,000 if such
final payment is paid on or before May 31, 1997 to $350,000 if such final
payment is paid after May 31, 1998 and on or before July 31, 1998 (and assuming
all Periodic Payments coming due prior to the final payment has been made), and
in such event the Plaintiffs shall waive the enforceability of the Judgment
Amount against the Company and no further payments shall be required of the
Company. In addition, the Company has agreed that upon the execution of a Joint
Venture Agreement, the Company shall pay the final payment within 90 days after
the earlier of the date such joint venture is signed or effective date of a
Joint Venture Agreement. The Company has paid all Periodic Payments due to date.
-63-
<PAGE>
NOTE 13 - LEGAL PROCEEDINGS (Continued)
------------------
The Company has also agreed to issue 433,334 shares (the "Forbearance Agreement
Shares") of its Common Stock to the Royal Bank Plaintiffs. The Company has
agreed to register such shares for resale pursuant to a Registration Statement
to be filed with the Securities and Exchange Commission. Also, the Company has
agreed to issue to the Plaintiffs, from time to time until the payments referred
to above have been completed, .025 shares of its Common Stock for each share
issued in excess of 24,000,000 of the Company's outstanding shares. Amendment
No. 2 also provides that the Company reimburse Plaintiffs for attorneys' fees
and costs incurred in connection with the preparation and negotiation of
Amendment No. 2.
The Company's obligations under the Royal Bank Agreement are secured by (1) a
deed of trust on all real property and patented and unpatented mineral claims
owned by the Company; (2) a first priority security interest in all of the
Company's right, title and interest in and to any and all goods, products,
yield, receivables, inventory (including any gold from any mines), any and all
exploration and drilling information, data, maps, reports or surveys, and
any and all income and proceeds derived from the Company's mining operations
on property which the Company presently or subsequently owns or leases; (3)
a first-priority security interest in the Company's right, title and interest
in and to any total recovery by the Company on the claims against Bartel, Eng;
and (4) a stipulated judgment in the amount of $3,250,000.
In fiscal 1996, the Company registered the 1,616,667 shares of Common Stock to
be issued and delivered pursuant to the Zuri Agreement and the Royal Bank
Agreement, which included the 300,000 additional shares that may have been
issued pursuant to the Royal Bank Agreement as described above. This number does
not include the Forbearance Agreement Shares (as described above).
THE ANDERSON MATTER.
The Company was plaintiff in the matter of Brush Creek Mining and Development
Co., Inc. v. Anderson, et al., United States District Court, Northern District
of California, case no. C94-3487 CAL, filed on September 24, 1994. The action
was against former officers and directors of the Company and others for
violations of federal and state securities laws and common law torts. On April
3, 1998, the Company's counsel, the Hinton & Alfert firm, withdrew as counsel of
record. Upon the Company's failure to obtain new counsel as directed by the
Court, the action was dismissed with prejudice on May 15, 1998. Following entry
of judgment of dismissal, two of the defendants moved as purported prevailing
parties for an award of attorney's fees and costs incurred in defending against
the Company's claims. The defendants sought by their motion to recover
$63,782.14. The Company retained this firm for the limited purpose of opposing
this motion. On August 21, 1998, the Court denied the defendants' motion.
Defendants have appealed this order, but this firm is no longer representing the
Company in regard to this matter.
THE VOLCANIC MATTER.
Volcanic Resources, LLC filed its complaint against the Company, its past CEO
and Chairman of the Board, and two of its Board members on August 12, 1998. On
September 16, 1998, Plaintiff filed its First Amended Complaint alleging breach
of contract and breach of express warranties against the Company only and
alleging fraud, negligent misrepresentation, rescission, constructive trust,
declaratory relief and violation of Business and Professions Code section 17200
against all Defendants. The underlying contract giving rise to this suit
involves a written Exploration, Development and Mine Operating Agreement entered
into November 20, 1997 between Sterling Mining, LLC and the Company. Sterling
Mining, LLC assigned its rights under the Exploration, Development and Mine
Operating Agreement to Plaintiff. The responsive pleading is due November 30,
1998. In accordance therewith, the individual Defendants are filing three
preliminary "motions": (1) Motion to Change Venue; (2) Demurrer; and (3)
Petition to Compel Arbitration. These motions are set for hearing on December
30, 1998.
-64-
<PAGE>
NOTE 13 - LEGAL PROCEEDINGS (Continued)
------------------
OTHER MATTERS.
In fiscal 1996 and 1997, the Company was requested pursuant to a non-public
informal inquiry by the staff of the Securities and Exchange Commission, to
provide information to the staff of the Commission regarding the Company's
financing activities in reliance upon Regulation S under the Securities Act.
The Commission advised the Company that the inquiry should not be construed as
an indication by the Commission or its staff that any violations of law have
occurred, nor should it be considered a reflection upon any person.
On October 24, 1994, the Company filed an amended complaint against F.
James Anderson, Simone Anderson, Edward M. Lawson, Consolidated Sierra Gold
Mines, Inc. ("CSGM"), Independent Sierra Gold Mines, Inc. ("ISGM"), Bartel, Eng,
Miller & Torngren, attorneys, Robert Sibthorpe, Coopers & Lybrand and Yorkton
Securities as defendants in an action to recover damages. The suit was filed in
the United States District Court for the Northern District of California as Case
No. C94-3487 (the "Federal Action"). On April 28, 1995, the Company filed a
third amended complaint which seeks to recover damages against James and Simone
Anderson for breach of fiduciary duty, for violations of Rule 10b-5 and 16(b),
and for violations of California Corporations Code Section 25400(d) and Section
25401. The lawsuit seeks to recover damages against Edward M. Lawson, Robert
Sibthorpe and Yorkton Securities, Inc. for breach of fiduciary duty. The lawsuit
seeks to recover damages against James and Simone Anderson, ISGM, CSGM, Robert
Sibthorpe, and Yorkton Securities, Inc. for intentional and negligent
misrepresentation. The lawsuit seeks to recover damages against the firm of
Bartel, Eng, Miller & Torngren based upon breach of fiduciary duty and
negligence claims.
The law firm of Bartel, Eng, Linn & Schroder has (as successor in
interest to Bartel, Eng, Miller & Torngren) filed a counterclaim in this
litigation seeking recovery from the Company of legal fees totaling
approximately $95,000. The accounting firm of Coopers & Lybrand has been
dismissed as a defendant from the litigation without prejudice.
As to the progress of the case to date, an initial round of discovery has been
completed. On November 15, 1996, the court granted defendants Yorkton Securities
and Robert Sibthorpe's Motion for Summary Judgment. Subsequent to entry of
summary judgment in their favor, Yorkton Securities filed a cost bill for the
sum of $15,752.85 and Mr. Sibthorpe filed a cost bill for $3,842.83. These
costs are not payable until the conclusion of the litigation against all other
parties. The insurer for Bartel, Eng, Miller & Torngren is in liquidation
proceedings under the control of the California Department of Insurance. The
Company intends to file a claim in that liquidation proceeding when claim forms
are issued. The court has set a trial date for the remaining parties of
November 24, 1997.
On February 8, 1996, the Company filed a complaint against F. James
Anderson and Simone Anderson in Superior Court of the State of California, in
and for the County of Sacramento, Case No. 96AS 00513 (the "Sacramento Action").
The complaint seeks (a) judicial determination and declarations that the Company
(1) has no further obligations to advance defense fees and costs incurred by the
Andersons in connection with the Zuri litigation, including on the Andersons'
appeal of that judgment (which fees and costs the Company agreed to pay
pursuant to a settlement in a previously resolved matter); (2) is entitled to
recoup defense fees and costs allocable to the Andersons' defense of claims
in the Zuri Invest litigation for which they were found liable; (3) is not
required to indemnify the Andersons for their liability in the Zuri Invest
litigation; (4) has no duty or obligation to the Andersons to account for,
replenish, and/or return monies to or pay interest on the $200,000 provided by
the Andersons as partial indemnification to the Company in connection with
the Royal Bank litigation; and (5) is entitled to have all amounts returned
to the Company from the $200,000 which were disbursed for the purposes other
than to indemnify the Company such that the Company receives the full net
benefit of the $200,000, and (b) equitable indemnification to collect from the
Andersons their proportionate share of the judgment in the Zuri Invest
litigation.
-65-
<PAGE>
NOTE 13 - LEGAL PROCEEDINGS (Continued)
------------------
On April 4, 1996, the Company was served with the Andersons' answer to the
Sacramento Action and their cross-complaint against the Company. The answer
generally denied the allegations of the Company's complaint and asserted various
affirmative defenses. The cross-complaint seeks judicial determination and
declarations that the Company (1) is obligated to advance the Andersons' defense
costs (including costs of appeal) in the Zuri litigation and defense costs in
the Federal Action and (2) is obligated to indemnify them from the judgment in
the Zuri Invest litigation and any judgment that might be rendered against them
in the Federal Action.
Also, on April 4, 1996, the Company was served with a motion by the
Andersons for summary adjudication of two of their cross claims which would have
forced the Company to advance the Andersons' defense cost in the Zuri litigation
and the Federal Action. On May 3, 1996, the Andersons' motion was heard by the
superior court and denied.
The Company answered the Andersons' cross complaint on May 6, 1996
generally denying the allegations and asserting various defenses. Although
the Company has not done so to date, the Company may attempt to amend its
original complaint to assert an additional claim to hold the Andersons liable
for the entire amount of the Royal Bank of Scotland settlement.
The Company is a party to other various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the business or financial position of the Company.
NOTE 14 - AGREEMENT WITH MK GOLD COMPANY
----------------------------------
During 1993, the Company and MK Gold Company, a wholly owned subsidiary of
Morrison Knudsen Corporation, entered into a nonbinding letter of intent to
jointly explore and develop mineral properties in, among other places, the
Republic of Kyrghzstan. The Company and MK Gold Company also entered into a
Joint Development Agreement to form a new corporation called MKZ Gold Company
(MKZ Gold) to explore, develop, and mine precious and base metals in the
Republic of Kyrghyzstan. On May 10, 1993, MK Gold Company and the Concern
Kyrghyzaltyn acting on behalf of the government of the Kyrghyzian Republic
entered into a general agreement to explore, develop, operate, and mine the
Jerooy Gold Project located in the Kyrghyzian Republic. The general agreement
was a binding agreement and called for the preparation of a mining Joint Venture
Foundation Document (the Venture Agreement) with the Kyrghyzian Republic.
Under the terms of the Joint Development Agreement, MK Gold Company would own
60% and the Company, through a wholly owned subsidiary, would own 40% of MKZ
Gold. Further, the board of directors of MKZ Gold would consist of five
members, three nominated by MK Gold Company and two nominated by the Company. MK
Gold Company and the Company intended to capitalize MKZ Gold with $400,000 based
on their percentage of ownership in MKZ Gold. MK Gold Company was to provide
mining operations and the Company was to provide geological services to MKZ
Gold.
On September 3, 1993, the Company served MK Gold Company with a complaint,
seeking declaratory relief with regard to the Joint Development Agreement. The
Company was seeking a declaration of its rights under the Joint Development
Agreement, including a declaration that the joint venture with MK Gold Company
exists under Idaho law, that the Company and MK Gold Company have equal rights
in the management of the joint venture, and that MK Gold Company owes the
Company $150,000. After serving the complaint, the Company and MK Gold Company
had discussions about resolving the dispute. MK Gold Company paid the Company
the $150,000 owed under the Joint Development Agreement.
On November 10, 1993, the Company amended its complaint seeking dissolution of
the joint venture between the Company and MK Gold Company and alleging fraud and
deceit, breach of fiduciary duty and breach of implied covenant of good faith
and fair dealing by MK Gold Company.
-66-
<PAGE>
NOTE 14 - AGREEMENT WITH MK GOLD COMPANY (Continued)
----------------------------------
In December 1993, the Company settled the lawsuit with MK Gold Company
receiving: (1) $4,232,000 cash; (2) a 4% net smelter return on any interest
which MK Gold Company obtains in the Kumtor project; and (3) the assumption of
all the Company's obligations to the International Foundation for Privatization.
The $4,232,000 is shown as sale of joint venture in the June 30, 1994
consolidated statement of operations.
NOTE 15 - SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ANDFINANCING
--------------------------------------------------------------
ACTIVITIES
----------
Noncash investing and financing activities as of June 30, are as follows:
<TABLE>
<CAPTION>
1998 1997
----- ----------
<S> <C> <C>
Partial settlement of litigation . . . . . . . . . . . . . $ - $1,200,000
Compensation recognized on stock options granted . . . . . - 24,000
Company stock issued to satisfy purchase price adjustments
agreements . . . . . . . . . . . . . . . . . . . . . . . - 753,175
Company stock issued to convert 7% convertible debenture. - 300,000
Company stock issued to acquire the New California
Placer Mine. . . . . . . . . . . . . . . . . . . . . . . - 20,000
</TABLE>
NOTE 16 - SEGMENT INFORMATION
--------------------
The Company's activities have been devoted to the acquisition, development, and
production of mineral properties. Accordingly, the Company is considered to be
in a single line of business. To date, substantially all of the Company's
identifiable assets and operating expenditures are in the United States.
NOTE 17 - CONVERTIBLE DEBENTURE PAYABLE
-------------------------------
On April 3, 1996, the Company received net proceeds of $400,000 on gross
proceeds of $450,000 from an offshore; two year, $450,000, 7% convertible
debenture. The subscriber has the option of converting all or part of the
principal to the Company's Common Stock forty-five days after the closing date
of the transaction. The note is convertible to shares at 70% of the average
share price for the five days preceding conversion. On June 17, 1996, $150,000
of the note was converted to 161,360 shares.
On July 8, 1996, the remaining $300,000 of the note was converted into 439,560
shares of the Company's Common Stock. The convertible debentures outstanding at
June 30, 1996 were classified as current portion of long-term debt.
-67-
<PAGE>
NOTE 18 - SUBSEQUENT EVENTS
------------------
Change in Management
- ----------------------
On November 16, 1998, Brush Creek Mining and Development Inc. received the
resignation of its chief executive officer (C.E.O.), James Chapin. Brush Creek
has accepted the proposal submitted by Mr. Larry Stockett, President of U.S.
Cement Company and the Board appointed him as the new President and C.E.O. Mr.
Stockett has accepted these positions without compensation until the company
reaches its first quarterly after tax profit. Upon resolution of Brush Creek's
current legal and financial problems, Mr. Stockett has agreed to transfer his
51% ownership in U.S. Cement Company to Brush Creek. In return, Mr. Stockett
will receive restricted shares of stock of Brush Creek at a price of $5 per
share for the audited book value of U.S. Cement. In addition, Mr. Stockett will
receive one million shares of Brush Creek restricted stock if the BCMDE shares
achieve a $5 per share closing price for 10 consecutive days.
NOTE 19 - YEAR 2000
----------
The Company has reviewed its current computer software and hardware systems and
is currently working to resolve the potential problems associated with the Year
2000 and the processing of date sensitive information by such systems. Based on
preliminary information, the Company believes that it will be able to implement
successfully the systems and programming changes necessary to address the Year
2000 issues, and does not expect the cost of such changes to have a material
impact of the Company's financial position, results of operations or cash f lows
in future projects.
-68-
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
-69-
<PAGE>
Year Ended
- -----------------------
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
--------------- ---------------
<S> <C> <C>
Net Loss . . . . . . . . . . . . . . . . . $ (5,386,831) $ (9,681,535)
Weighted Average Common Shares Outstanding 4,660,433 2,136,576
--------------- ---------------
Net Loss per Common Share. . . . . . . . . $ (.12) $ (.47)
=============== ===============
</TABLE>
-70-
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
-71-
<PAGE>
1. B. Creek Acquisition Corporation
2. Alpha Hardware
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 417415
<SECURITIES> 0
<RECEIVABLES> 500
<ALLOWANCES> 0
<INVENTORY> 39735
<CURRENT-ASSETS> 457650
<PP&E> 6499495
<DEPRECIATION> 0
<TOTAL-ASSETS> 5429240
<CURRENT-LIABILITIES> 1845283
<BONDS> 0
0
0
<COMMON> 53643325
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5429240
<SALES> 0
<TOTAL-REVENUES> 15390
<CGS> 2487019
<TOTAL-COSTS> 5392021
<OTHER-EXPENSES> 4000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6200
<INCOME-PRETAX> (5386831)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5386831)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5386831)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
